Transcription:

Episode 21 – All About DROP 11:11

This is Blue Money, a finance podcast made for cops by cops. With us, you know your money’s safe. Lieutenant Jim Donnelly of the Bensalem Police Department and co-host Kevin McGarry of Valley Financial Group, come together to help protect and serve your financial needs. This is Blue Money.

Jim Donnelly: I want to welcome everyone back to the Blue Money Podcast. This is your host, Jim Donnelly. I’m here with my co-host Kevin McGarry.

Kevin McGarry: Jimmy.

Jim Donnelly: Hey Kev. Today I thought we’re having a really good topic to speak about DROP. And it’s a big topic out there. It’s a buzzword when everyone going to retire. Everyone knows we’re going to get a lump sum of money. We’re not sure what to do with it, how to handle it. So, what’s your thoughts about that, Kev?

Kevin McGarry: Well, the first thought is, a lot of people that we speak to Jim, they don’t even know what the hell DROP is. What is it?

Jim Donnelly: Yeah, Kev. So the DROP, it’s an acronym. I had no idea it was for years either until I got in the financial interest.

Kevin McGarry: I thought it was your hands when I passed all the post.

Jim Donnelly: I still sometimes like, what’s DROP stand for? So, now DROP stands for a Delayed Retirement Option Plan. That’s what DROP stands for. It started in the 1980s in Louisiana. And the reason they started out there for three factors. One encouraged the police and the fire personnel out there to retire after 20 years to continue working for like four or five more, because they could leave after 20. The other thing allowed a partial lump sum distribution option to the pension plan. So, it’s great for the employee, they’re going to get a big lump sum of money, probably more money than they ever got handed to their life. And then for the employer, why they did it is because it was a great tool to predict their employee cycle and when they’re going to have to hire people, when people are going to be getting out. So, it was a great tool for that. It really was.

Kevin McGarry: So, essentially it’s a holding bin for their pension. Once they go in a DROP, the years of service is no longer going to their pension. It’s going into this bucket for them that’s getting sub interest.

Jim Donnelly: That’s correct Kevin. It goes into a bucket now. Departments range from Bensalem. It’s a three year, some Middletown in Bucks County used to be eight, dialed back to five. The average, the most we see is four, Philly PDs is four. So, it’s all varies. But the low we usually see is three. The high we ever saw was eight. But you’re right. So, for all those years, like I’ll say Bensalem, how Bensalem works for DROP. So, Bensalem’s a little different than Philly PD and other departments. And what I mean by that is I got a 90 day window to say if I want to do DROP or not, after I turn 52 and I have 25 years of service, I got 90 days to say I’m want to do DROP or not. If I say I’m not, I can stay via Cop Bensalem for as long as I want. But if I say I’m going to enter DROP at 55, I’m out. And what they base my pension is at Bensalem is my last three years of salary. So, if I made 150,000 my last three years, my pension’s going to be 75,000. That’s how it’s going to work. Now Philly and other departments, they got a great benefit, meaning they can enter DROP whenever. So, they could be a cop for 40 years, they’d be 60 years old and say, you know what, I’m going to enter DROP four years, I’m out. Now I don’t know how that really benefits the town, not the township but the city or these small townships because they don’t know when you’re going to leave or not. But Bensalem, it’s a little different. I don’t understand why we do it at Bensalem, but it’s a perk. If you’re a Philadelphia police officer, you can do as long as you want and enter DROP for four years or some of these other townships. So, it’s a big perk.

Kevin McGarry: When do you think’s the best time to enter DROP?

Jim Donnelly: To me, I think every situation’s different. I think it all depends the age of your children. Some people have children later in life and maybe their kids are in college. I mean there’s some people that wouldn’t have any kids. They can retire early, maybe have a second career. A lot of these officers have some side second hustles. So, I think every situation’s different. And I think that’s why when you think you’re going to enter DROP, you should talk to somebody. You should talk to a financial planner. Somebody should give you some guidance to do a financial plan for you and see where you’re at in life.

Kevin McGarry: Yeah. Because you don’t want to leave anything on the table. I mean, number one is you could be up for a promotion and you don’t want to leave a higher income level than going to DROP before a month before you did.

Jim Donnelly: You’re right. There’s a lot of factors that play at role. I mean there’s three type of police officers that we see here at Valley or anyone I talked to, the first cop that’s going to retire, he’s in DROP. He wishes he would’ve put more money away in his 457. He hasn’t. But he’s going to get a lump sum maybe 300,000. To him that’s the biggest lump sum he was ever handed.  And now he’s getting a little overwhelmed. He wants to invest it. He don’t know the first thing about investing and you don’t want to pay a lot of taxes. So, he’s just kind of overwhelmed. That’s cop number one. Second cop we deal with a lot is a cop. We talk to them, what are you doing when you get the DROP money? Oh, I already have it spent. I’m buying the boat, I’m getting a shore house.

Kevin McGarry: What’s the boat’s name?

Jim Donnelly: Oh man.

Kevin McGarry: Sink?

Jim Donnelly: Yeah, bad bet. So, they had the money spent. Maybe some of it’s good, maybe they want to pay some towards their kid’s college. But there’s a lot of things, it’s material that we see. Like they want to buy the Rolex. They want to buy like what you said, the boat, the in-ground pool money’s already spent. The third police officer that we see a lot, that’s the cop that, listen, I need to buy a truck. I need to buy a car because my car is broke or I need to pay my high credit card bills off. But I want to invest the most of it. That makes sense. A lot of it. But what we’re trying to say is we don’t have a magic wand. So, if you’re going to listen to this podcast and think, oh man, I thought I was going to find out exactly what to do with my money, that’s just not going to happen because we don’t have a magic wand. Every situation’s different. There’s no blanket statement.

Kevin McGarry: Yeah, I think the big thing of all three examples is what we see sometimes is they go in a DROP without a plan. There’s zero plan, I may get a job. I’m not sure how much my life costs to live my wife and I. So, I think that the most prudent thing to do is number one is know what it’s going to cost once you’re no longer working. Number two, are you trying to benefit? Are you trying to max out those 457 plans, those 401 plans and take advantage of the catch up provisions in the retirement accounts. And because you want to know what it’s going to cost and how much it’s going to cost, you’re going to have your pension and some townships and cities do benefit and get social security quicker they put into it. But some don’t. It’s just really important just to figure out what your life’s going to cost when you’re out and how do you plan to pay for it. I mean you want to go through some of the catch up provisions, Jim.

Jim Donnelly: The one catchup provision that’s very big for law enforcement is we have the 457B and with that there’s a pre-retirement catch up. So, that means is they’ll go back to your last, when you’re about to retire within three years, you can go back from January 1st, 1979 and the money, the years that you didn’t max out your accounts there’s still kind of room there that you could add in. But every year there’s a ceiling. So, this year and you can add, put it in your 457 22,500. But now if you’re 50 and over with most people are retiring, there’s a catch up provision of 7,500. So, now we’re at 30,000 you can put away. But with this pre-retirement catch up with the 457B, they’re going to allow you to put another additional 15,000. So, you can put in 45,000 and your 453B this year if you’re going to retire within three years. And you can do that for all three years. So, it’s another great catch provision.

Kevin McGarry: Allows you to catch up and also reduce your tax bill for those three years.

Jim Donnelly: That’s the main thing Kev everyone has to remember the tax bill. You got to remember they got one shot to get this right that you don’t want to just cash out. Next thing you know when you’re doing, maybe you made 150,000 this year and you want to cash out your 457, I mean your DROP money and now you got a higher tax bracket, now you’re going a 30% tax bracket before you were at 20. So, you never know what tax bracket. You got to be careful with that. Got a plan for it.

Kevin McGarry: I mean, I think it’s important when you stop working and receive the DROP, you have options. Number one, as Jim just mentioned, you can lump sum it or you have a nice tax bill those on those assets or you can roll it into a retirement account like an IRA.

Jim Donnelly: I think our advice for off the get go, if someone doesn’t know what to do, don’t cash out. Roll it over. And you can take a breather, you can get meet with someone and then take it. Because if you’re retired and it’s 457B, that’s where all most of this money’s going to roll over. You are going to take it out even though you’re not 59 and a half without getting penalized. You’re still going to pay taxes on it. But if it’s going with 457B and you’re 52 years old, you’re not going to have to pay that tax like that penalty. So, don’t panic if you don’t know what to do, roll it in and then talk to someone. The worst thing you can do is cash it out, pay taxes on it, get that big tax bill and now you’re like, oh, I’m going to roll this money in. It’s backwards.

Kevin McGarry: Right, right. Totally agree.

Jim Donnelly: So Kev, what takeaways do you want to take?

Kevin McGarry: I mean, the takeaway for me, simple before you go into DROP. Know your options. And have a plan. Because we’ve seen too many times, someone who worked 20, 30 years as a law enforcement officer, a police officer, and they go in and they make the wrong decisions and they cost them financially.

Jim Donnelly: And my ending, I would say, Kev, is first congratulations if you’re on the DROP or you’re just finishing DROP, you made it, you made it to the finish line, you’re almost there. Now you have to make sure you do it right and that’s the main thing. You want to finish strong. You want to max out these accounts while you’ll still have your last couple years you want to talk to a professional. There’s nothing to be embarrassed about that you don’t know what to do with the money. There’s none. Don’t, get over that because if you get over that, you’re going to have a long, healthy retirement and you’re going to be on the right path. If you don’t and you make some bad mistakes and decisions, it could cripple you for the rest of retirement. So, remember that. Get some free advice. There’s a lot of financial planners out there. Me and Kev are always here. You can call us, text, emails, we’ll give you a free financial plan. We’ll walk through it. We’ll show you different scenarios about your DROP money. We’ll walk you down that path, we’ll lead you down to the water.

Kevin McGarry: No, it’s just a process we’ve been through hundreds of times.

Jim Donnelly: So, thank you guys for listening to the Blue Money Podcast. If you have any questions or concerns about anything with the DROP or just your portfolio in general, don’t hesitate to reach out. Be safe out there.

Kevin McGarry: Be safe.

Thanks for listening to Blue Money. To learn more about Jim and Kevin or for a free financial assessment, visit valleyfinancial.com or click on the link in the podcast description or show notes. Until next time, safe investing.

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