2021 Deferred Retirement Option Plan ("DROP") Interest Rates

Date: Nov 13, 2020


At today’s meeting, SDCERS’ Board of Administration voted to approve new DROP account and DROP annuity interest rates, which will be effective January 1, 2021. The DROP account rate is the interest rate used by SDCERS while a Member is in DROP and the DROP annuity rate is the interest rate used by SDCERS to annuitize the DROP monies of a Member who has exited DROP and retired. These rates are calculated annually using publicly available indexes as of September 30 of each year.
Effective January 1, 2021, the DROP account interest rate will be 1%, compared to the current rate of 2.5%. This interest rate will be compounded quarterly and applied to all active DROP participants’ accounts as long as the participant is actively employed by the City of San Diego, San Diego Unified Port District, or the San Diego Regional Airport Authority on the last day of each quarter. This rate is subject to change annually, which means a DROP participant’s account may receive a different interest rate every year during their participation period, depending on the Board’s actions.
Also beginning January 1, 2021, the DROP annuity interest rate will be 2.1%, compared to the current rate of 3.1%. This interest rate will be factored into the calculation of a DROP retiree’s monthly DROP annuity, if they DROP retire between January 1 and December 31, 2021 and choose to annuitize their DROP account. Unlike the DROP account interest rate, the DROP annuity rate will not change for an individual member – the rate that is in effect when a member DROP retires is the rate that will be applied to their annuity, regardless of whether or not the DROP annuity rate changes in future years. If you are nearing the end of your five-year DROP participation period, your decision to DROP retire before or after the New Year may be affected by the Board’s decision regarding the DROP annuity interest rate. However, if you do not plan to annuitize your DROP account upon exiting DROP, then the DROP annuity rate changes will not affect you. Click here to review your options regarding how you may choose to receive your DROP account.
For example, if your DROP account balance is $250,000 on December 31, 2020, and you choose to DROP retire at this time and annuitize your account over 20 years, your monthly DROP annuity would be approximately $1,400, which factors in the current DROP annuity rate of 3.1%. By the end of the 20 years, the total interest added to your DROP annuity payments would be $85,770. Therefore, you would receive a total of $335,770 from your DROP account over the course of the 20-year annuity.

In this same hypothetical, if you choose to DROP retire on January 1, 2021, your DROP balance would increase to $251,562 because your account would receive interest for the last quarter of 2020. However, if you then choose to annuitize your account over 20 years, your monthly annuity would be calculated using the 2021 DROP annuity rate of 2.1%, giving you a lower monthly DROP annuity of approximately $1,285. In this case, your total DROP annuity interest would add up to $56,732, making your total DROP payments over the 20-year annuity approximately $308,295.

As you can see from the above examples, your monthly DROP annuity could be lower if you DROP retire in 2021 compared to if you exit in 2020. However, this does not necessarily mean you need to rush to exit DROP before January 1, 2021; you should consider your personal circumstances (including your flexibility regarding the timing of your eventual retirement, the amount of additional funds your DROP account will accrue if you continue working during 2021, and your financial situation) and weigh them against the possible financial benefit of exiting DROP before the end of the year. Also, for those of you who will not reach the end of their five-year DROP period in 2021, remember that we have no way of knowing what the DROP rates will be in 2022.

If you are currently in DROP and considering retiring before Dec. 31, you must begin the process immediately as counseling appointments will fill up fast. To begin the process, you must first go to your Member Portal account and click on “DROP Retirement Application” from the left menu, under Tools. Review this information, make your selections, and SUBMIT THE APPLICATION ONLINE. Once received, you will be contacted by an SDCERS staff member to schedule your personal phone counseling appointment. At your appointment, you can ask questions and make any changes you’d like to your application. Your electronic application is not final and you have not retired until you’ve submitted your signed application signature page, which will be emailed to you by your retirement counselor during your appointment.

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