If the FERS High 3 salary shifts to a High 5 calculation, how would that affect the pension for federal employees? Learn how to calculate your average salary for federal retirement benefits.
Calculate Your High 3 Salary for Federal Retirement and How a Change to “High-5” Could Impact Your Pension
Understanding how to calculate your high-3 salary is crucial for federal employees planning their retirement. The high-3 salary is a key component in determining the pension benefits under the Federal Employees Retirement System (FERS). There have been numerous times over the past decade or so where the idea of shifting to a “high-5” has been suggested by members of Congress. This article will also will also examine how that could reduce your retirement income from FERS, the likelihood of the change happening during the current administration, and why retiring now might be a good idea, but only if you were considering an early retirement already.
Will FERS High 3 for Federal Retirement Change to a High 5 Average Salary?
With the recent efforts to reduce the size of the federal workforce and government spending, the idea of changing the calculation for FERS retirement has been brought up again. To review, a federal employee’s pension is determined by the following calculation:
Estimate Your Federal Pension with our Federal Retirement Calculator
Changing the high 3 average salary to a high 5 average would cause the annual FERS benefit amount to be lower in almost all cases. The computation of the high-three average salary takes the highest paying consecutive 36-months of your federal career and averages them out, leaving the final amount to be used when calculating the annual pension. If a fed made $100,000, $102,000, and then $103,000 in the last 3 years of working, the average would end up being 101,667. Now let’s say, for our example, that this same federal worker had an annual income of $96,000 and $93,000 in the additional two years that would be included if the FERS formula were to switch to the “high-5. The average ends up being 98,800. When plugging these two figures into the FERS computation for the annual federal pension amount (see below), results in an annual pension amount of $20,333 when using the employee’s high-three salary and $19,760 when using the high-5.
The above illustrates the impact changing to a high-5 average could have on a FERS annuity amount. The 1.0% multiplier and 20 years of service were used in both calculations. In the above hypothetical scenario, changing to a high-5 will have cost this individual over $5,000 after 10 years of collecting their pension (and that’s before you factor in cost of living adjustments).
Should Federal Employees Retire before Possible Change to High 5?
It might be too soon to tell if legislators are going to seriously pursue this shift in how FERS retirement benefits are calculated, changing the high three average to a high five. That being said, it would most likely only apply to those who retire from the federal government on or after a certain date, meaning retiring now would lock in the FERS pension amount that was computed using the optimal salary average. But, continuing to work would not only add time to the length of creditable service used in one’s FERS calculation, but also raise the average itself if your rate of pay stays the same or increases during those additional years worked. This is where a cost-benefit analysis would be beneficial to weigh the pros and cons, especially if conducted with a financial planner that is also an expert in federal benefits and a fiduciary, which means they have to keep your financial interests first. If the potential threat of a change in how the average salary is calculated for your pension is your only reason for wanting to retire from federal service now, then it might be too soon to panic. However, if it is one of many things you are considering when deciding to retire or not, then talking with a financial advisor can help you understand the best route to take per your financial goals.
What is the High 3 Salary and Why is it Important for Federal Retirement Applications?
Understanding the High 3 Average Salary: Types of Pay
The high-3 average salary is the highest average basic pay you earned during any 3 consecutive years of federal service. This period does not necessarily have to be the last three years of service, but it often is for many federal employees because that is when they typically earn their highest pay. The Office of Personnel Management (OPM) uses this average to calculate your pension benefits. It is essential to understand that the high-3 salary includes your total amount of basic pay and any locality pay adjustments but excludes overtime, bonuses, and other forms of additional compensation.
Importance of High-3 in FERS Pension Calculation
For FERS employees, the high-3 salary is a critical factor in determining the amount of your pension. The FERS retirement system uses the high-3 average salary in conjunction with your years of service to calculate your annuity. The formula typically involves multiplying your high-3 salary by a percentage based on your years of service. (Usually 1.0%, 1.1% with at least 20 years of service, if employee’s retirement date is after they turn 62.) Therefore, a higher high-3 salary directly translates to a higher pension, making it a vital component of retirement planning for retiring federal employees.
How to Calculate Your High-3 Years Salary for Federal Retirement
Steps to Determine Your High-3 Average Salary
To calculate your high-3 salary, you need to identify the three consecutive years during which you earned the highest average salary. This involves reviewing your employee’s bi-weekly salary records to determine the periods with the highest basic pay and locality pay, but most feds receive their highest pay during their last three years. Once identified, sum the basic pay for these three years and divide by three to get the average. This average is your high-3 salary, which will be used to calculate your pension benefits. We have a tool to help estimate your high three average salary if you scroll down on the FERS calculator page.
Common Mistakes in High-3 Salary Calculation for Federal Retirement
One common mistake in calculating the high-3 salary is failing to include all eligible forms of pay, such as locality pay adjustments. Another error is not correctly identifying the highest earning consecutive years, which can lead to an underestimation of your high-3 salary. Additionally, some federal employees mistakenly use gross salary figures instead of basic pay, which can skew the calculation. Ensuring accuracy in these areas is crucial for an accurate pension computation. Knowing what your federal pension is worth helps when you plan your retirement.
Impact of Years of Creditable Service on High-3 Calculation
Your years of service play a crucial role in the high-3 salary calculation. The more years of service you have, the higher the percentage of your high-3 salary used to calculate your pension. For example, a federal employee with 30 years of service will receive a larger pension than one with fewer years, assuming the same high-3 salary. This makes it important to consider the impact of extending your federal service to maximize your retirement benefits.
Calculation of the High-Three Average Salary for CSRS Employees
For CSRS and CSRS offset employees, the high-3 calculation follows a similar process but is used to calculate the CSRS annuity. The high-3 salary is multiplied by a percentage based on years of service, with the resulting figure representing the annual pension. Although the CSRS system is different from FERS, the high-3 salary remains a critical component used in the calculation of federal retirement benefits for CSRS employees.
Strategies to Maximize Your High-3 Salary
There are several strategies federal employees can employ to maximize their high-3 salary. These include seeking promotions or assignments with higher pay, taking advantage of locality pay adjustments, and timing your retirement to coincide with peak earning years. Additionally, understanding the impact of environment differential pay and formerly hazardous pay can help you make informed decisions about your career path. By implementing these strategies, you can enhance your high-3 salary and secure a more substantial pension.
Reach Out to Us!
If you have additional federal benefit questions, contact our team of CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Federal Employee Benefits Consultants (ChFEBC℠). At PlanWell, we are federal employee financial advisors with a focus on retirement planning. Learn more about our process designed for the career fed.
Preparing for federal retirement? Check out our scheduled federal retirement workshops. Sign up for our no-cost federal retirement webinars here! Make sure to plan ahead and reserve your seat for our FERS webinar, held every three weeks. Want to have PlanWell host a federal retirement seminar for your agency? Reach out, and we’ll collaborate with HR to arrange an on-site FERS seminar.
Want to fast-track your federal retirement plan? Skip the FERS webinar and start a one-on-one conversation with a ChFEBC today. You can schedule a one-on-one meeting here.
