What Impact Does the High-3 Have on Your FERS Annuity?

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By on November 5, 2019 in Retirement with 0 Comments

Words 'retirement plan' written at the top of a small notepad sitting on a wooden surface next to a pen and calculator

One major concern for federal employees is what they will bring home from their pension in retirement.

To help you get a good idea of what your FERS pension may be, Retirement Benefits Institute has a FERS Calculator. Knowing your high-three estimate is a key factor in being able to use this calculator. Let’s look at what makes up your high-three.

The high-three is the average of your highest-paid period of 36 consecutive months. This three-year period can be at any point of your federal career. Your regular pay, along with any locality pay, is included in the calculation for your high-three average.

Additional Pay Impact

However, certain additional pay during your high-three period is typically not included, such as bonuses, overtime, cash awards, military pay, and overseas cost-of-living adjustments (COLAs).

We say “typically” because, in certain instances, some of these forms of additional pay may be included in your high-three, such as night differentials for wage-grade employees and law enforcement availability pay [LEAP], formerly known as Administratively Uncontrollable Overtime [AUO] for law enforcement.

Estimating Your High-Three

Depending on where you are in your federal career, you may not yet have hit your high-three and it may be necessary to estimate this number based on expected future earnings. If so, you should try to be conservative starting out. You can always adjust your estimated high-three upward later.

Once you know your high-three estimate, we use this along with your total years of federal service to calculate your federal annuity by plugging those numbers into one of the following equations.

Three separate formulas exist for calculating most FERS annuities:

  • The standard FERS annuity formula
  • The enhanced FERS annuity formula for FERS employees who retire at age 62 or older with at least 20 years of service
  • The FERS Special Provisions formula for law enforcement officers, firefighters, and air traffic controllers

FERS Pension Calculation

Standard FERS Annuity High-3 x 1% x Years of Service = Annual Annuity
Enhanced FERS Annuity High-3 x 1.1% x Years of Service = Annual Annuity
Special Provisions FERS Annuity High-3 x 1.7% x First 20 Years of Service = (A)
High-3 x 1% x Rest of Years of Service = (B)
A+B = Special Provisions Annual Annuity

Staying One Year Longer

Let’s look at an example of how staying one year longer can change your high-three.

Jimmy is a federal employee who is considering retiring at age 60 or age 61. He is okay with working the extra six months but wants to know how that will affect his pension. Jimmy’s high three if he goes at 60 will be $95,000.

How would staying six months affect his high-three estimate?

Since Jimmy is working at the highest paid position in his career, every month he stays will raise his high-three.

Let’s assume Jimmy’s salary over the last three years was $94,000, $95,000, and $96,000. His high-three would then be $95,000; however, if he were to work another year, Jimmy’s salary for that year would be $97,000. Jimmy’s extra year of work at $97,000 would replace his year of work at $94,000 in his high-three. This would raise his high-three from $95,000 to $96,000.

The extra year of service would also add time to Jimmy’s length of service in his annuity calculation. The chart below illustrates the differences in his annuity if he retired at age 60 versus if he retired at age 61.

Annuity Differences

  Retiring at Age 60 Retiring at Age 61
High-3 $95,000 $96,000
Length of Service 20 Years 21 Years
Annual Annuity $19,000 $20,160

As the table above illustrates, should Jimmy decide to work the extra year, that would add over $1,100 to his pension. It’s important to note this amount would be added to his annual amount; it is not an addition of $1,100 monthly.

For some federal employees, working a little longer for an increased benefit makes sense. Others may find that they are simply ready to go and have no desire to continue working to increase their benefit. The decision of when to retire is a very personal decision that encompasses a wide range of factors. Your high-three estimate is simply one of the many factors that will affect this decision.

To gain clarity about what your retirement pension will be, take a moment to utilize Retirement Benefits Institute’s FERS Calculator.

Disclosure: The information contained in these blogs should not be used in any actual transaction without the advice and guidance of a tax or financial professional who is familiar with all the relevant facts. The information contained here is general in nature and is not intended as legal, tax or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters. RBI is not a broker-dealer, investment advisory firm, insurance company, or agency and does not provide investment or insurance-related advice or recommendations. Brandon Christy, President of RBI, is also president of Christy Capital Management, Inc. (CCM), a registered investment advisor.

© 2019 Brandon Christy. All rights reserved. This article may not be reproduced without express written consent from Brandon Christy.

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About the Author

Brandon Christy, CPA, PFS, is the founder and president of Retirement Benefits Institute, Inc. He is an established leader in contracted federal retirement benefits education, and his company has trained over 10,000 federal employees to help them gain clarity and confidence in retirement.

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