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, Administratively Uncontrollable Overtime [AUO], and law enforcement availability pay [LEAP].
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; and the FERS Special Provisions formula for law enforcement officers, firefighters, and air traffic controllers.
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 61 or age 62. 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 61 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 61 versus if he retired at age 62.
As the chart above illustrates, should Jimmy decide to work the extra year that would add over $3,176 to his pension. It’s important to note this amount would be added to his annual amount; it is not an addition of $3,176 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.
