Your 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 annuity calculation. (Defined contribution plans, in contrast, base the annuity on the total contributed to the fund, by employer and employee.)
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.
Normally, “leftover” service time – days under 30 – is dropped, and leftover sick leave – hours under 174 – is dropped. But if these two leftovers, together, add to a full month, then the employee gets credited with one additional month.
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 it 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.
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.
For John, this 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|
|(1.75 * 5 = 8.75)||8.75% of $75,294 = $6,588|
|(2.0 * 10.91666)||21.83332% of $75,294 = $16,439|
Add the three components together, and the resulting annuity is $28,674, or $2,389 per month.
Note for FERS Retirees: With the exception of disability and MRA+10 retirements, FERS employees who retire under age 62 are entitled to an annuity supplement. If it is a VERA retirement, the supplement does not start until the employee reaches the MRA (Minimum Retirement Age). Calculation of the supplement is quite intricate and lengthy. See separate article.
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.
- 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.
The author developed the free annuity supplement software, which can be downloaded from: https://www.mediafire.com/?yzqd2d3alh31zix