If you’re a federal employee approaching retirement, one of the best benefits you stand to receive for your years of service is your Federal Employee Retirement System (FERS) basic benefit, often known as the monthly annuity.
It is a major source of retirement income for federal workers. Knowing how your payment is calculated can help you make a more informed decision on when to retire and how your benefits will work into your overall retirement strategy.
Key takeaways:
- Knowing your High-3 salary can help you better estimate your future FERS retirement income.
- Delaying retirement until you qualify for the 1.1% FERS multiplier (age 62 with at least 20 years of service) could significantly boost your pension.
- Understanding how age, service, and salary work together can help you retire with greater confidence.
What Is Your Average High 3?
Your high 3 is the average of your highest three consecutive years of basic pay under FERS, and they do not need to be calendar years.
While your highest income years are most commonly the last three years you are working, it’s not always the case.
How to Calculate Your FERS Benefits
Your average high 3 salary is just one component of calculating your full FERS benefits. Your years of service working as a federal employee (YOS) and your retirement age impact the size of your benefit.
Unused sick leave is converted into days/months for the purpose of crediting additional partial years when determining your time as YOS.
Military service is eligible to be bought for additional FERS YOS but is not automatically applied – you must elect this conversion.
Your full FERS monthly benefit is calculated using the following two formulas depending on your retirement age:
Using the Formula to Determine Your Retirement Timing
By understanding how your annual FERS payment is calculated, you can work backwards to determine the timing that best fits into your overall retirement plan.
If you are under age 62 at Separation for Retirement, or age 62 or older with less than 20 Years of Service, your benefits will be 1% of your average high 3-year salary for each year of service.
If you are age 62 or older with at least 20 Years of Service at the date of your Separation for Retirement, your benefit is increased to 1.1% of your average high 3-year salary for each year of service. This bonus is not available for younger retirees regardless of service time and will not switch over at age 62.
Example:
A federal worker who retires at age 60 with 25 YOS and a High 3 of $65,000 (1% x 65,000) would receive a benefit of $16,250 per year. Retiring at age 62 with the same YOS and
High 3 (1.1% x 65,000), the federal worker would receive an increased benefit of $17,875 per year – a permanent 10% increase!
Therefore, a higher-paying position or a raise boosts your average high 3-year salary. This will help you in the near term, as you earn more, and in retirement with a higher benefit payout.
Federal workers can be eligible for early retirement if they have reached their Minimum Retirement Age (age 55-57, depending upon your year of birth) and have 10 years of service. Those that elect early retirement will have their basic benefit permanently reduced by 5% for each year they retire before age 62.
Bottom Line
Stepping into retirement is one of the biggest decisions you will make. And deciding when you will make that transition could mean thousands of dollars more or less into your retirement pocket.
To learn more about strategies you can use to maximize your FERS basic benefits, download our guide FERS Made Simple: Understanding and Maximizing Your Benefit.
For a personalized calculation of your high 3 for federal retirement and other benefit factors, consider speaking to a financial adviser. An adviser can provide an entirely individualized and comprehensive retirement plan that includes a variety of estimations based on your FERS benefit. They may even suggest different strategies to take that you may not realize are available to you.
Click here to schedule a complimentary consultation to get the conversation started.
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