By Allen Giese, CLU®, ChFC®, ChSNC®, and Gary Gonzalez

As you approach retirement, what should you do with your accumulated leave?

Get paid on it? Burn it? Keep letting it accumulate throughout your DROP?

What's the right answer for you?

Well, today we're going to sit down with my good friend, retired Miami-Dade Fire Rescue Battalion Chief and author of A Public Safety Officer's Guide to the Florida Retirement System, Gary Gonzalez, to talk about it.

Allen: So, as I mentioned in the intro, you're a retired Miami-Dade Fire Battalion Chief?

Gary: Yeah.

Allen: Do you miss it?

Gary: You know, it's kind of a mixed bag. I don't really miss the work. I mean, I loved almost every minute of my career. But the thing I miss most are the people. Fortunately, you've given me the opportunity to stay in touch with quite a few. And I've also organized breakfasts for retirees, and active people will come by and have a breakfast. Then I've organized lunches, and I've often visited stations and gone back to headquarters just to stay in touch. So, it's the people that I really miss.

Allen: You have helped so many firefighters and police officers, corrections officers, just make better decisions around their retirements. What is it that you find most rewarding?

Gary: Well, I actually see this part-time career, oddly enough, as an extension of my work as an officer. Let me clarify what I mean by that. My primary responsibility as an officer—I felt—was to keep the people who worked with and for me safe. That was kind of two-pronged: to make sure that we were highly trained, and also to make sure we were just having each other’s back and we all knew the game plan.

Because of the FRS’s lump sum options, the DROP, the investment plan—we're talking about significant amounts of money that we have access to as public safety employees. And so, the financial advisor world starts circulating like sharks. They want a piece of that action. If I can get through to someone to teach them how to avoid falling into the pitfalls that are out there all around them, then I feel like I’ve done my job of keeping them safe financially.

Allen: Yeah. It's unfortunate how financial advice is delivered most of the time.

Gary: Yeah.

Allen: So we have our discovery meetings with police officers and firefighters and corrections officers every week. And one thing that we’ve learned that has been pretty much in common for most of them is leave hours.

Gary: Yeah.

Allen: What do they do with their leave hours?

Gary: In a lot of ways, that’s a personal decision. There are basically two ways to treat those hours. One is to get paid in a big, fat check at the end of your career. And another way is to burn that time. Now, the caveat with burning time is: Each department is unique, each department is different, and so you'll have to check with your personnel department to find out if that’s even an option. But those are the two options.

Allen: So, there are actually some departments where you can't burn any time?

Gary: Yes, actually, that’s true.

Allen: OK.

Gary: Yeah.

Gary: So planning ahead is important, right?

Allen: Definitely.

Gary: To know your department’s rules, to know what is possible with that time.

Allen: So, are we talking about significant amounts of time here and significant amounts of money?

Gary: Yeah, we can be. I've seen payouts for that final check as high as $100,000.

Allen: Wow.

Gary: Yeah. And, you know, that can be hugely beneficial in many ways if you choose to take the payout. Obviously.

Allen: I mean, it must affect their AFC.

Gary: Oh, that’s actually a good point. So, if you’re entering the DROP, the FRS (Florida Retirement System) allows you to get paid up to 500 hours of annual leave and have that contribute to your Average Final Compensation.

Allen: So that's consistent across all departments?

Gary: That’s correct. It's a Florida Retirement System rule.

Allen: OK.

Gary: Yeah. And so, what that means is, let’s say you make $60 an hour, and you get paid your 500 hours before entering the DROP—well, that's $30,000 spread across either five or eight years, depending on when you were hired. For the rest of your life, it's going to increase your pension payments, and it's going to increase your DROP account lump sum also.

Allen: Wow. That can make a big, long-lasting difference.

Gary: Absolutely. So, if there’s any possible way you can have 500 hours before entering the DROP, you should.

Allen: So that sounds like something you'd want to start planning years in advance.

Gary: Yeah, you definitely want to measure how much time you’re using when it comes to your annual leave and just make sure that when it comes time to entering the DROP, you have that 500 hours.

Allen: OK. So because this is, as you mentioned, significant amounts of money—if you're taking the payout, that’s going to really increase their taxes.

Gary: Yeah, it really will. And it depends on when you take it. If you take it at the end of your career, typically your pension paychecks are going to be less than your salary, so it's going to be less of an impact—but still an impact. But if you're doing it to enter the DROP, then that $30,000 for that one year could be a huge hit.

Allen: Is there a way to protect it?

Gary: Yeah, there actually is. If you have a Deferred Compensation Plan—also known as a 457 plan—what you can do is take advantage of two retirement catch-up provisions. There's a 50-and-over retirement catch-up provision, which just automatically happens when you turn 50 and allows you to increase your deferments into your 457 account by $7,500.

There’s also another provision that you have to trigger called the three-year retirement catch-up provision. That one allows you to double your contributions for the last three years of your career.

Allen: So, you can do one of them, not both?

Gary: You can't do both, right. You can only do one at a time. There's an important timing element with the three-year retirement catch-up provision as it relates to the DROP.

So, the way it works—I don’t know why it works this way—but if you file for DROP and then try to participate in a three-year retirement catch-up provision, they will not allow you to. So, you have to trigger this three-year retirement catch-up provision first, without establishing a firm DROP entry date. And then, of course, plan that three years so it captures that final payout, and you can roll that final paycheck—up to twice the normal contribution amount for the year—directly into that account, saving all of that money from taxation.

Allen: So, set up the catch-up provision before you activate your DROP.

Gary: That’s correct.

Allen: That sounds important.

Gary: It is important.

Allen: Very good. What would you say the downside is for cashing out your hours?

Gary: Well, I mean, we kind of touched on one of them, which is the tax hit you’re going to take. Also, if you cash out, you're not going to be able to burn time, which is the other option—obviously, there will be no time to burn.

Allen: So, what would be the advantages to burning your time, then?

Gary: Ah, yes. So that would be more emotional than financial. Although, extending your career can be of benefit if you’re in the investment plan—allowing those dollars to accumulate for as long as you can extend that retirement date, that official ending date.

Allen: But I’m interested in more of this emotional or non-financial ...

Gary: Yeah. So, when I retired, I left at 7:00 in the morning after a 24-hour shift. I think I was up three times after midnight—typical night in my battalion—and went from all of this—all of these relationships, all of this adrenaline, all of this purpose—to ... career is over.

Allen: You're saying it was abrupt?

Gary: It was dramatic. Yes. At first, it felt like a long vacation, but then the vacation never ended. Now, don’t get me wrong, retirement doesn’t suck—it’s definitely worth the adjustment. But one of the things you can do with your hours is make that landing into this next phase of your career a little bit softer by gradually slowing down and using this time to come into work less and less per week, less and less per month.

Now the caveat is: Not all departments will allow you to burn your time this way. So, you need to check with your personnel departments to see if this is an option for you.

Allen: So, one of the end results or the answers might be a little of both?

Gary: Absolutely, right. If there's a certain amount of cash you need or want—you want to pay something off, you want to buy something as a gift—then you can just set that aside to be paid and then burn the rest of the time.

Allen: Still allowing you to have that sort of mental health aspect of burning time.

Gary: Yeah, because when you get closer to the end of your career, you really want it to be over sooner and sooner. So, this is also a way to kind of take care of yourself and just burn the time, ease in, take it easy.

Allen: You know, there are so many aspects to financial planning that aren’t necessarily about money.

Gary: That’s true.

Allen: And this sounds like we’ve uncovered one.

Gary: Yeah.

Allen: So, somebody who’s thinking about this or seriously starting to open up these questions—what should they be doing?

Gary: Well, I mean, I would definitely talk to my tax advisor, my accountant. You can definitely talk to us—we're happy to help you figure this all out and figure out what makes the most sense for you.

And I’ve actually also written a book for public safety officers retiring in the Florida Retirement System. That book will have much more detail. It’ll drill down much more deeply about these subjects we’re covering today.

Allen: So, it’s been a popular book. I think we’re on printing number nine.

Gary: Yeah, I think you’re right. Which—you know—we have to stay current with many of the changes that happen legislatively. So, each time that happens, we write a new version.

And by the way, you can have access to this book free of charge. All you have to do is contact the office, and we’ll send one out to you.

Allen: Well, this has been very informative. Thanks for taking the time today.

Gary: Well, thanks for having me—I really enjoyed it. And for those of you still working out there, I’m hoping we’ll do this again. There are a lot of topics to cover. So, until then, be safe out there.