The High-3 salary for FERS is one of the variables used in the retirement calculation when claiming retirement benefits.
Along with what age you retire and years of service you’ve accumulated, the high-3 average salary is a component used in computing the amount of annual benefits you will receive from the federal pension – both CSRS and FERS. The retirement age along with years of credible service determines a percentage, which is next multiplied by the years of service, and then that product is multiplied by the high-3, which is an average rate of pay across the consecutive 3 year period in which the employee earned their highest salaries.
Keep it Basic
When determining your rate for the 3 years, it is important to remember what types of pay are included. For the majority of federal workers, the two types to worry about are basic pay and any locality pay. Other types that can be included are:
- Environmental differential pay (formerly known as hazardous pay)
- Premium Pay
- Law Enforcement Availability Pay
- Night differential pay (for the Federal Way System)
- Special Pay (given for recruitment and retention purposes)
All other types of pay are not included. The lump-sum received for accrued annual leave, overtime, bonuses, cash awards, and holiday pay are all not permissible to include when computing your high-3. The same goes for the following:
- Sunday Premium Pay
- Military Pay (non-civilian)
- Night differential pay (General Schedule)
- Foreign or non-foreign post differential pay
- Travel allowances outside of regular tour-of-duty
- Bonuses for recruitment and retention purposes (as opposed to “special pay” mentioned above)
- Payments for credit hours
It’s About Time
For both the years of service and High-3 salary components, it is important to remember that a 360-day calendar is used when calculating your pension amount. So regarding the highest-paid 3 years, for each block of time where you worked under a specific pay rate, it needs to be broken out into a “years-months-days” format where every year consists of 12 30-day months. Once that’s completed, step back and you should notice, because the rate of pay fluctuates annually, you shouldn’t have any timespan longer than 11 months and 29 days, because that’s when the next annual rate kicked in. Now, for each block, determine the time factor. This is where you need the OPM CSRS and FERS handbook, chapter 50, page 50 (tip: while it is on page 50 of the document, should you print it, the chart needed is on page 57 of the PDF file when viewing online.) Using the chart, you can figure out the time factor needed. 11 months and 29 days, for example, is 0.997. The last step, for each block of service, is to multiply the annual basic pay rate earned during that time by the time factor.
Consecutive but Not Continuous
For the 3 years needed, the service time has to be consecutive but not continuous, which can get tricky when trying to understand. The “blocks” of time used figuratively above have to represent 3 years of service in total, but can be spaced apart by breaks in federal civilian service. Also, remember that breaks in service are slightly different than LWOP (leave without pay). If the LWOP duration is less than 6 months, it can be included as credible service hours. After 6 months of LWOP, it becomes the same as a break in service for high-3 purposes.
To illustrate this, imagine you worked three separate full-time jobs for the federal government. Once from 1990-1996, then again for another year in 2010, and finally you occupied the last position in 2019, and let’s also say you’re now 62 in 2021. For the high-3, you could use blocks that included pay rates you received in 1996, 2010, and 2019, but you couldn’t use two years of service from 1995 and 1996, then skip the 2010 salary, to go on and add in the 2019 salary. (For this hypothetical situation, you started with six years in the ‘90s, so you’ve attained the five required years of service to become eligible for FERS benefits at age 62.)
Putting It All Together
Once you’ve multiplied each block’s salary by its respective time factor, you will be left with at least three dollar amounts. The average of those figures, the high-3 salary, is what is used in the final retirement calculation.
This can be important if you’re on the fence about retiring. Annual raises and within-grade increases in the future can boost your high-3 and thus your future pension check, but it’s worth sitting down and crunching the numbers to see how much those potential raises would really be worth – especially if it is the only thing holding you back from retiring sooner. Depending on other factors, you might want to work longer for reasons not directly related to the high-3 at all. And as always, the advisors at Serving Those Who Serve are here to help.
Until Next Time,
**Written by Benjamin Derge, Financial Planner. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.