Considerations Before Deciding When to Enter/Exit DROP

City Members hired before July 1, 2005; Port Members hired before October 1, 2005; and Airport Members hired before October 2, 2006 have the option to participate in the Deferred Retirement Option Plan (“DROP”) when they become age and service eligible to retire. You can review our DROP Fact Sheet for more detailed information about this program, but one important aspect of DROP is that when a member enters, they generally must exit and fully retire within five years of their DROP entry date (exception for City firefighters). Many DROP participants elect to stay in DROP and continue working for their plan sponsor for the full five-year period, while many others only stay in for a fraction of that time – it is entirely up to each member if they want to exit DROP early based on their personal circumstances.
 
That being said, here are a few things to consider before you decide when to enter (and possibly when to exit) DROP, not in any particular order:

1. COLA – The annual cost of living adjustment (“COLA”) applies every July to the monthly pension benefit of every DROP participant who entered DROP by the previous June 30th. The COLA can increase your pension benefit up to 2% in any given year. Therefore, some members intentionally choose to enter DROP on or before June 30th so that their benefit receives the COLA immediately.
   
   Note: The Board approves the COLA at its May meeting each year, so you will know what the COLA will be more than a month in advance. However, keep in mind you must enter DROP at the beginning of a pay period, which may not be exactly on June 30th – plan ahead to schedule your DROP entry date accordingly; if you decide you want to enter DROP before July 1st of a given year in order to receive the COLA in July, we recommend submitting your online DROP entry application by early May, so we can schedule your counseling appointment in May or the beginning of June. Don’t procrastinate until the end of June, or you may risk being unable to enter DROP before July! 

2. Annual Member Contribution Account Interest – On the flip side, if you enter DROP after June 30th of a given year, your member contribution account receives the annual compounded interest (currently 6.5%), which only applies to members who are not retired or in DROP as of July 1st. While the interested added to your contribution account does not increase your base pension benefit, it will slightly increase your Cost of Living Annuity (“COL Annuity”) and Surviving Spouse Annuity (only applicable if you choose the Maximum Benefit (Single) option). However, this increase is rarely greater than the increase due to the COLA would be, but still something to keep in mind!

3. DROP Account Interest – While you are participating in DROP, your DROP account will receive quarterly compounded interest at whatever the current rate is in effect on the last day of each quarter (DROP interest rates are subject to change each year – new rates are generally announced at the November Board meeting and go into effect the following January 1st).
   
   However, you must be working and participating in DROP on the last day of the quarter in order to receive interest for that quarter, so this is something to consider before deciding when to exit DROP. This also matters when deciding on your DROP entry date because if you enter DROP towards the end of a quarter and stay in for the full five years, you will not receive interest for the last quarter of your DROP participation period (unless you are a firefighter and able to extend your DROP period through the end of the quarter), thereby likely missing out on the last quarter interest payment to your DROP account. For example, if you enter DROP on June 15th and stay in for the full five years, your last day of work must be on June 14th five years later; therefore, your DROP account would not receive interest for the 2nd quarter of that year, since you wouldn’t be working on June 30th.

4. Final Compensation – For those eligible to enter DROP, the “Final Compensation” used to calculate your pension benefit is your highest pensionable salary averaged over 12 consecutive months. If you recently received a salary increase, especially a significant one, you may want to continue working and receiving that higher pay for a while before you enter DROP, in order for the higher salary to be factored into your pension benefit calculation – if you enter DROP shortly after receiving a raise, it won’t significantly increase your pension benefit.
   
   Also, keep in mind that if you have reciprocity with another California public retirement system, the Final Compensation that SDCERS reports to the reciprocal system will be your Final Compensation as of your DROP entry date, not your DROP exit date. This means that even if you receive a salary increase while you are participating in DROP, it will not affect your pension benefit either from SDCERS or the reciprocal system.

5. Birthday – Your retirement factor, another element of your pension benefit formula, is determined based on your plan tier and age at DROP entry, prorated in quarterly increments.  When deciding on your DROP entry date, consider your exact age – for example, if your plan tier’s retirement factor increases between 60 and 61, and you enter DROP when you are 60 years and 7 months old, the factor used in your benefit calculation will be slightly higher than what would be used if you retired at 60 years and 5 months old. Therefore, if your tentative DROP entry date is close to your next quarter age, you may want to push your entry date a few weeks so your pension benefit calculation will use that slightly higher retirement factor.

6. DROP Annuity Interest Rate – Finally, the last consideration is only relevant if you are interested in taking the DROP annuity after you exit. (See this article discussing your options regarding how you'd like to receive your DROP account when you exit.) Like the DROP account rate, the DROP annuity rate is subject to change each year, with new rates typically announced at the November Board meeting, which go into effect the following January 1st. Unlike the DROP account rate, your DROP annuity calculation is locked in at whatever the current DROP annuity rate is in effect on the day that you exit DROP. Therefore, in your last year of DROP, if the Board announces in November that the DROP annuity rate is going to decrease in January, you may want to exit by the end of December so your annuity is calculated before the rate goes down. (In this case, don’t forget that your DROP account would not receive 4th quarter interest.) If the annuity rate is going to increase in January, then you may want to wait until after December 31st to exit, so your DROP annuity is calculated at the higher rate.
   
   However, in order to take advantage of the latter situation, you must have the flexibility to do so based on your DROP entry date – for instance, if you entered DROP towards the end of a calendar year and you stay in for the full five-year period, then you will not be able to wait until the following January to exit, even if the annuity rate is going to increase.

All of these considerations are important, but must be balanced by your personal circumstances and desires. As you can see, it’s impossible to take advantage of every single factor listed above, because many of them work against each other – for example, if you enter DROP in June, you set yourself up to receive the COLA immediately, but you are sacrificing the 2nd quarter DROP account interest payment in your last year of DROP. If you wait until July to enter, your COL Annuity and Surviving Spouse Annuity (if applicable) will increase, but you won’t receive the COLA until the following July. So on and so forth. If you have any questions about the considerations described above, please contact SDCERS via our Contact Us page or by calling (619) 525-3600 on regular business days between 9:00 a.m. and noon, or 1:00 to 4:00 p.m. (PST).