Under a DROP — Los Angeles Fire & Police Pensions operates the prominent local example — an eligible member's pension benefit is calculated and frozen at entry, and from then on the monthly benefit accumulates in a DROP account while the member keeps working and drawing salary, for up to a maximum participation period set by the plan. At exit you leave employment, take the accumulated account, and start the (frozen) monthly pension. Entry is close to irreversible, so the modeling — entry date, the accumulation-versus-continued-accrual trade, and the tax treatment of the eventual distribution — has to happen first.
How to read this page. This is a framework, not a recommendation. There is no answer here that fits everyone — only the inputs that drive your answer. Run the numbers with us, or run them on your own; either way, run them before you file.
The mechanics, per LAFPP
The shape of LAFPP's DROP, per the plan's own materials (every parameter below should be confirmed against current LAFPP publications before it enters anyone's model):
- LAFPP eligibility: Tier 2 or 4 with 25+ years of service; Tier 3, 5 or 6 with 25+ years and age 50+.
- At entry your retirement benefit is calculated as if you retired that day — your service credit and final average salary are locked in as of the entry date.
- During participation you keep working and drawing salary, while the monthly pension is credited to your DROP account rather than paid to you; the account is credited with interest at 5% a year. Participation runs up to 60 months; entrants on or after 1 February 2019 may add up to 30 months to make up suspended months, with no interest after the first 60. Member and City contributions continue during DROP (not into the DROP account) until the tier's maximum years of service. COLAs apply to the frozen benefit, subject to the tier's COLA cap.
- At exit you separate from employment, your monthly pension (as frozen at entry, adjusted per plan rules) begins being paid to you, and the DROP account is distributed — as a lump sum, rollover or a combination.
These are LAFPP rules: DROP overview, enrollment, and participation. If your program differs, confirm with your system.
Why entry is semi-irreversible
Entering DROP fixes your benefit base: service credit stops accruing toward the formula and your final average salary is locked, so later promotions and raises no longer flow into the pension. Under LAFPP rules, you may leave any time from one day to five years, but leaving DROP means ending sworn employment. Service purchases must be done before entry; a disability pension forfeits the DROP account. The honest planning posture is the same one we use for survivor elections: treat it as permanent, and do the analysis while it is still a choice.
The trade you are pricing
Strip away the branding and DROP is one comparison:
Enter DROP
You bank a stream of pension payments (plus crediting interest) into a lump-sum account while still earning salary — but your pension stops growing. Every subsequent raise, promotion and year of service credit is excluded from the benefit you will draw for the rest of your life.
Keep accruing
No account accumulates — but each additional year adds service credit, and late-career raises flow into final average salary, permanently lifting the lifetime (and survivor) benefit. For members still ascending in rank, that foregone growth is the real price of DROP.
Neither side wins in general. The lump sum is visible and feels like found money; the foregone benefit growth is invisible and compounds for decades. A fair model prices both.
The modeling that should precede entry
- Entry date. DROP entry is date-sensitive: entering just before a raise or promotion locks the old salary into your formula forever. If advancement is plausible, model entry now against entry after it lands.
- Length of stay. The value of DROP depends on actually working the intended participation period. Model an early, unplanned exit — injury and family events do not consult the plan document.
- The account versus the accrual, honestly. Project the DROP balance at exit against the higher lifetime benefit that continued accrual would have produced, across several longevity scenarios — we model scenarios, we do not predict lifespans. Include the survivor dimension: a permanently higher base benefit also raises what a survivor option protects.
- Tax treatment of the distribution. Tax depends on your age and situation; confirm with a CPA and review the IRS guidance on exceptions to tax on early distributions. Aduna Capital does not provide tax advice; this item belongs on your CPA's desk before entry, not after exit.
- What the lump sum is for. A DROP balance with a job — debt payoff, a bridge to a second career, investable assets — is a plan. A lump sum without a purpose has a way of becoming a boat. The model should include what the money will actually do.
Who tends to benefit — a framework, not a verdict
DROP tends to look better for members whose salary and rank have plateaued (little foregone formula growth), who intend to work the full participation period anyway, and who have a concrete use for a lump sum. It tends to look worse for members with promotions ahead, those likely to leave early, and those for whom a permanently higher lifetime and survivor benefit is worth more than an account. "Tends" is doing real work in both sentences — none of this is a conclusion about you. It is arithmetic on your salary trajectory, your dates and your plan's current terms. Run it with us or run it yourself; run it before you sign.
Common questions
Common questions
Is DROP 'free money'?
No. The account is funded by freezing your benefit — the payments banked during DROP are payments computed on a pension that stops growing. Whether the accumulation beats the foregone growth is precisely the calculation to run before entering, and it comes out differently for different careers.
Can I change my mind after entering?
Under LAFPP rules, you may leave any time from one day to five years, but leaving DROP means ending sworn employment. Confirm with your system before relying on any flexibility.
What should I do with the DROP payout?
That is a full-picture question — taxes, debts, the second career, the survivor election, and everything else you own. We will model the options side by side, including the option of doing nothing quickly. Beware anyone whose answer arrives before your numbers do, especially if they are paid on the rollover.
Model it before you file
These elections are permanent. We will run the arithmetic with you — your numbers, every scenario on one page — while they are still choices. Fee-only, fully disclosed, no products to sell you.