Some years ago, I was discussing annuity calculations with a personnel specialist. She boasted to me that in an office with 80 specialists, she was the only one who could do a high-three calculation manually, that is, with paper & pencil and hand calculator. Yes, it was difficult. Still is. Why?
Well, we all know the high three is the highest average of an employee’s three consecutive years of salaries. Usually, this will be the final three years before retirement. What makes this difficult? The difficulty lies with the need for weighting the individual salaries, in accordance with how long they are in effect.
In order to weight the salaries, you must, first, convert each one to a fraction of a year.
Tom made a $81,832 salary, but only for 8 months. Divide the 81,832 by 365 to get a daily increment, then multiply by number of days it was in effect. For Tom this would be (240 * 224.19), or $53,807 (use 30-day months throughout).
Above takes care of one salary. Do the same for each of the other salaries he received, making sure the first does not extend earlier than three years.
Now add the 53,807 and all the other components. Divide by 3. That’s it! You just calculated the high-three. Fairly easy to understand, but somewhat tedious to perform.
Or you could just perform one simple calculation on Tom’s retirement deductions, which is the way the Office of Personnel Management (OPM) does it.
Let’s say Tom had $1,870.15 for retirement deducted from his pay over the course of 3 years. He started as a fed prior to 2013, so his deduction rate is 0.8%. For this rate, multiply the deduction by 125 and the result – $233,768.75 – is his 3-year retirement earnings total, regardless of how many different salary levels he had; now divide by 3 and you have determined his high-three: $77,922.
Above is an improvement, but you can go one step further. The author provides free software that fully automates the procedure for both FERS and CSRS, and “special” (law enforcement/fire fighter/ATC) employees. In addition, the program has the old, traditional procedure for the high-three, using dates and salaries. Readers can request a free copy of the software for calculation of the high-three from firstname.lastname@example.org.