Your retirement annuity, whether you are CSRS or FERS, is determined by your length of service and your high-three salary. Your annuity is calculated by multiplying your high-three salary by a percentage factor that is derived from your length of service. This article will take a look at exactly what constitutes your high-three salary, while a future article will look at how your length of service is determined.
According to the Office of Personnel Management, your high-three salary is “the largest annual rate resulting from averaging an employee’s rates of basic pay in effect over any period of three consecutive years of creditable civilian service, with each rate weighted by the length of time it was in effect”.
The three year period does not have to begin on the first of the year, the first of a month, or any other specific date (such as the date of a pay increase). In fact, the most common method of calculating a high-three is by subtracting three years from the employee’s date of retirement.
For example, if you were going to retire on December 31, 2010, (See Choosing the Best Day for a Federal Employee to Retire
) your high-three would begin on January 1, 2008 and end on December 31, 2010. This method of computing a high-three will work if, like most of us, your highest three years are your last three years of work.
For those who have a high-three that is not their last three years, three years would be subtracted from their last day at their highest rate of pay.
Let’s say you were a grade 12 with four years to go until you were going to retire, and were subject to a Reduction in Force (RIF) on March 31, 2006. After the RIF, you were unable to find another federal position at the grade 12 level and ended up taking a grade 7 for your last four years of work. If you retired on December 31, 2010, your high-three would not be the preceding three years; it would be the period between April 1, 2003 through March 31, 2006 – your last three years at the grade 12 level.
Your high-three pay will include:
- Locality pay (cost of living adjustments, such as those for Alaska and Hawai’i are not currently included, but are being changed to locality pay over the next few years);
- Environmental pay;
- Night differential, but only for WG (wage grade) employees; and
- Certain availability and/or premium pay for special category employees.
High-three will not include:
- Awards or bonuses;
- Overtime; and
- Night differential for employees who are not WG.
If you want to estimate your high-three, there are several things you can do:
- If you are close to retiring, you could use last year’s salary
- If you will be retiring in a year or so, you could use this year’s salary
- If it will be a while before you retire, you can use today’s salary for the grade and step you expect to be at when you retire.
Articles on determining length of service will be coming in the future.