Most federal employees have heard the term “High-3,” and many understand that their pension will be a percentage of this amount. But few know how to compute their High-3 or what pay is actually included in it. However, since your High-3 is required to calculate your pension, it’s critical to understand in order to estimate your retirement income when planning your retirement. So, this week we’ll do a deep dive into what’s included in your High-3 and how to compute it.
Your Pension Formula
Before we dive into how to compute your High-3, let’s do a quick review of how it fits into your FERS pension formula. Your FERS pension (aka annuity) will be based on the following formula: your High-3, multiplied by your years of credible federal service, and by a percentage multiplier (1% or 1.1% and 1.7% for SCEs).
Note: Special Category Employees (SCEs) have a different formula; you can learn more about it here.
What Pay Is Included?
Unfortunately, not all pay is included when determining your High-3. Here is a list of what pay is included in your basic pay computation:
• Your Base Salary
• Shift Rates
• Locality Pay
• Night Differential Pay (Wage Grade Only)
Now what’s not included in your basic pay:
• Overtime Pay
• Overseas Cost of Living Adjustments
• Lump-sum payments (annual leave, etc.)
• Travel Allowances
• Danger Pay
• Holiday pay
• Sunday premium pay
How To Calculate Your High-3
Now let’s review the High-3 calculation. Your High-3 is the average of your highest-paid consecutive 3 years of service. Meaning it does not have to be the last 3 years of your career (although it often is) and is not based on calendar years. So, your High-3 could be from July 2017 to June 2020, if this was when you had the highest average pay.
Quickly Estimate Your High-3
If you are still several years away from retirement, it might not be worth the time getting too precise with your calculation since your High-3 will likely change by the time you retire.
In this case, a rough estimate should do. Begin by taking the 3 consecutive years when you received the highest pay and select your basic pay from the middle year. This will be a pretty good estimate of your actual High-3.
The More Accurate Approach
Once your retirement is around the corner, it’s time to get more precise numbers for retirement planning. To begin, you’ll need to collect your SF50’s.
1. Selecting The Period
When selecting the periods you had the highest basic pay, keep in mind that the 3 years must be consecutive but are not required to be continuous. Hence, separate periods can be combined provided there is no intervening service. Here is an example straight from the OPM handbook:
- 2. Time-Weighted Pay Rate
- Because each pay rate is weighted by the length of time it was in effect, the longer you had the higher salary, the more it will increase your High-3 average. So, once you’ve selected the periods, you’ll have to account for any pay adjustments (step increases, promotions, etc.) and the weight each pay rate will have.
- To account for each pay rate adjustment shown on your SF 50, you can use the Time Factor Table from Chapter 50 of OPM’s CSRS/FERS Handbook.
When using the table, find the time factor corresponding to the period for each pay rate to find the actual amount you’ll use.
For instance, let’s say your basic pay was $51,500 from 10/1/2017 to 01/06/2018, which covers 3 months and 5 days. Using the Time Factor Table, we’ll see that 3 months and 5 days equals 0.264 of a year.
When we multiply your basic pay of $51,500 by 0.264, we get $13,596. This amount is the basic pay for this period. You would continue this process for every pay increase received during the 3-year period to get the total basic pay. After you have the sum for the 3-period, divide by 3 to get your High-3.
Note: LWOP status of 6 months or less may be used in computing the High-3.
Whether you see your retirement as a finish line or starting line, one thing’s for sure: You won’t have the retirement you want if you don’t plan ahead. By understanding how your High-3 is calculated, you’ll not only have a clearer picture of your retirement income, but you’ll also be able to spot any OPM errors. Lastly, consult with a qualified financial planner if you’re not confident in creating your retirement plan or want a professional opinion.
Want To Make Smarter Financial Decisions?
Start on your path to financial freedom by getting our monthly articles full of tips on maximizing your benefits and making smart financial decisions, plus the occasional freebie.
2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.