The High-3 salary for FERS and CSRS 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.
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:
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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:
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.
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.
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Until Next Time,
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 Serving Those Who Serve writers and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **
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