FERS and the High-3 Average: Why It’s More Important Than You Might Think for Retirement

Key Takeaways

1. Your High-3 average is the cornerstone of calculating your FERS retirement annuity, making it crucial to maximize your earnings during your highest-paying years.

2. Understanding how the High-3 average works can help you plan for retirement effectively and avoid surprises.

The Foundation of FERS: What is the High-3 Average?

The Federal Employees Retirement System (FERS) provides a stable foundation for retirement, but at the heart of it lies the High-3 average. This calculation represents the average of your highest-paid three consecutive years of federal service. Whether you’re a current federal employee or nearing retirement, understanding this key metric is vital for planning your financial future.

The High-3 average isn’t limited to your base salary; it includes locality pay, shift differentials, and even certain bonuses. However, it doesn’t account for overtime or other additional pay types. Knowing what counts and what doesn’t can make a significant difference in your retirement annuity.

How is the High-3 Average Calculated?

To calculate your High-3 average, the government identifies your three consecutive years of highest earnings. These years don’t necessarily have to occur at the end of your career, but for most employees, they often do. The formula works like this:

1. Add your total basic pay for the three consecutive years.

2. Divide the total by three to find the average.

For example, if your basic pay during your top three earning years was $90,000, $92,000, and $94,000, your High-3 average would be $92,000. This figure directly impacts the amount of your FERS retirement annuity, so even small increases in your salary during these years can significantly boost your retirement income.

Why Timing Matters for Your High-3 Average

When you hit your peak earning years can affect your High-3 calculation. Many federal employees find that these years occur toward the end of their careers when promotions, longevity increases, and locality pay adjustments are highest. However, timing isn’t always predictable. Personal choices like taking a lower-paying role for work-life balance or relocating to an area with reduced locality pay can lower your High-3 average.

Consider planning your career trajectory with your High-3 in mind. If possible, aim for positions with higher pay grades or locality adjustments as you approach retirement. Every dollar added to your High-3 can compound over time, potentially adding thousands of dollars to your annuity over the course of your retirement.

The Role of Creditable Service in Your High-3 Calculation

It’s not just about the numbers; your creditable service is equally important. Creditable service includes:

• Years and months of federal civilian service covered by FERS.

• Periods of military service if you’ve made a deposit for them.

• Approved leave without pay under certain conditions.

Breaks in service, part-time employment, or unpaid leave can impact the calculation. Ensuring all your creditable service is properly recorded can help avoid errors that might lower your retirement annuity.

How the High-3 Average Shapes Your Retirement Annuity

Your FERS retirement annuity is calculated using the following formula:

Annuity = High-3 Average × Years of Creditable Service × Multiplier

The multiplier is typically 1% for most employees, but it increases to 1.1% if you retire at age 62 or older with at least 20 years of service. This seemingly small difference can significantly impact your lifetime benefits, especially when combined with a higher High-3 average.

For example, if your High-3 average is $92,000 and you have 30 years of creditable service, your annuity would be calculated as follows:

• At 1%: $92,000 × 30 × 0.01 = $27,600 annually

• At 1.1%: $92,000 × 30 × 0.011 = $30,360 annually

Over 20 years of retirement, the difference adds up to $55,200—a compelling reason to consider delaying retirement if you’re close to meeting the higher multiplier threshold.

Strategies to Maximize Your High-3 Average

Maximizing your High-3 average requires deliberate planning, particularly in the years leading up to retirement. Here are some strategies to consider:

1. Target Promotions Strategically

Promotions that occur within your final years of service can substantially boost your High-3 average. If you’re eligible for advancement, timing it during your peak earning period is ideal.

2. Consider Locality Pay

Relocating to a higher locality pay area can increase your basic pay, which directly contributes to your High-3 average. Be mindful, though, of the costs associated with moving and living in such areas.

3. Avoid Extended Unpaid Leave

While life events may necessitate time away from work, extended periods of unpaid leave can reduce your overall earnings, affecting your High-3 calculation. If possible, limit unpaid leave during your peak earning years.

4. Use Accrued Leave Wisely

Taking lump-sum payouts for unused annual leave at retirement can indirectly enhance your financial security. While it doesn’t affect your High-3 average directly, it provides additional income as you transition into retirement.

Common Pitfalls to Avoid

1. Misunderstanding What Counts

Not all earnings count toward your High-3 average. Mistaking overtime pay or bonuses as part of the calculation can lead to unrealistic expectations. Familiarize yourself with what qualifies as basic pay.

2. Ignoring Errors in Service Records

Errors in your creditable service records can lower your annuity. Regularly review your records and correct any discrepancies promptly.

3. Delaying Planning

Waiting until your final years of service to consider your High-3 average can limit your options for increasing it. Start planning early to make the most of your earning potential.

How Life Events Can Influence Your High-3 Average

Life events like marriage, divorce, or family obligations can indirectly impact your High-3 calculation. For example:

• A divorce might lead to taking a lower-paying position closer to family.

• Relocating for a spouse’s job could affect locality pay.

• Personal priorities may shift, leading you to forgo promotions or higher-paying roles.

Balancing personal and professional goals is essential. Communicate with your agency’s human resources office for guidance on how life changes may influence your retirement benefits.

Planning for Life After Retirement

Your High-3 average plays a significant role in determining your FERS annuity, but it’s not your only source of income. Many federal retirees also rely on:

• Social Security Benefits: Available starting at age 62.

• Thrift Savings Plan (TSP): A valuable supplement to your FERS pension, particularly if you’ve taken advantage of matching contributions.

When planning your retirement, consider how these income sources will complement your annuity. Creating a comprehensive retirement budget can help ensure you’re financially prepared for life after federal service.

Secure Your Future: The Power of the High-3 Average

Understanding and maximizing your High-3 average isn’t just a financial exercise—it’s a way to secure the retirement you’ve worked hard to achieve. By planning strategically, avoiding common pitfalls, and considering the bigger picture, you can make the most of your federal benefits and enjoy a comfortable retirement.