How Is Your Annuity Calculated?

By on April 4, 2010 in Current Events, Retirement with 0 Comments
Your federal annuity is what is known as a “defined benefit” annuity. This means it is based, essentially, on just two numbers: length of creditable service, and high-three average salary. (Contributions to the pension fund are not part of the equation.)
Length of service. This is years and whole months, with each month being one-twelfth of a year. Service time is increased by sick leave, with each 174 hours equivalent to one month. For FERS employees the amount of sick leave is first reduced by one half, before applying this factor. (For retirements on/after January 1, 2014, the reduction is abolished.)
Examples. John and Mary each have 20 years 7 months of service, and 800 hours of sick leave.
They each have 20.58333 years. But John, being CSRS, gets credit for 4 additional months, which brings his total up to 20.91666 years. Mary (FERS) is credited with 2 months more, making her total 20.75 years.
High-three. This is the highest average salary over any 36 consecutive months during the employee’s career, with each salary weighted in proportion to how long it was in effect. The high-three can be earlier, but in most cases this will be the last three years of the person’s Federal employment.
Once you know the service time and the high-three, you are ready for the arithmetic.
FERS Employees. For Mary, simply divide the service time by 100, and then multiply by the high-three. Let’s say Mary and John each have a high-three of $75,294. For Mary, (20.75 / 100) = 0.2075. Then (75294 * 0.2075) = $15,623, or $1,301 monthly.
CSRS, for John, is more complicated. Multiply the high-three by 1.5% for each of the first five years, 1.75% for each of the next five years, and 2.0% for the remaining time. Add these three together and the result is the annuity. John’s annuity would be:
· (1.5 * 5 = 7.5)      7.5% of $75,294 =    $5,647.05+
· (1.75 * 5 = 8.75)   8.75% of $75,294 =  $6,588.22+
· (2.0 * 10.91666)   21.83332% of $75,294=$16,439.18
Add the three components together, and the resulting annuity is $28,674, or $2,389 per month.
Because CSRS employees pay 7.0% into the retirement fund, in contrast to the 0.8% paid by FERS members, the CSRS annuity is significantly higher.
Exceptions: 
  • In both retirement systems, fire fighters, law enforcement, and air traffic controllers — known as “special category” employees — pay more into the pension fund, and receive a larger annuity for the first 20 years of service. For CSRS the first 20 years yield a flat 50%, and FERS employees get 34%.
  • If a retiring FERS employee is 62 or more, and has 20+ years, the percent per year is 1.1 instead of 1.0.
For a fast, easy, and reasonably accurate estimate of your annuity, go to fedbens.us and click on no. 1 on the menu. A detailed, more accurate estimate can be obtained by clicking on number two. Number three is a handy program for precisely calculating your high-three. (Editor’s Note: This software will not work with all computer systems and browser applications.)

© 2016 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

About the Author

Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University.

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