ProFeds Founder, Chris Kowalik, explains the pension calculation that employees can expect if they are RIF’ed.
Key takeaways:
- The pension formula
- The challenge of including military service
- The high-3 average (and potential change to the “high-5”)
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Transcript of this episode coming soon:
Originally released on 3/7/2025
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For federal employees thinking about how the RIF will ultimately affect them, there’s a common question that we keep hearing, and that is, does my pension get calculated in a different way if I take a different type of retirement, like an early out or a discontinued service retirement? I want to talk briefly about the calculation. How do you know how much you get, when you get it? All of those good things.
Hi, I’m Chris Kowalik of ProFeds and welcome to the FedImpact Podcast where we offer candid insights on your federal retirement.
Reduction in Force – Will I Get a Different Pension Calculation (and When)?
This episode is going to talk all about whether that pension gets calculated in a different way.
The Pension Calculation
And so I want to first start by talking about what a normal pension calculation, what that formula looks like. So normally there would be a regular pension calculation of taking your high three average times the number of years of federal service that you’ve had and multiplying that by 1%.
If you happen to be at least stage 62 with at least 20 years of service in your pension calculation, then you’re going to get a 1.1% factor. But for most people that we’re talking about, we’re looking at that 1% formula. Again, high three times the number of years with decimal places for month and looking at that 1% formula, high three number of years times 1%.
The formula does not change if you go out under an early out or a discontinued service retirement, that basic formula is the same. The difference though is that if you take an early out at 50, but you were planning to wait until 57 to go, that’s when you were going to be fully eligible to leave, your pension will not be the same. The formula is the same, but you have seven fewer years in the pension calculation and seven fewer pay raises that go into your high three.
The formula is the same. The outcome is likely very different. How different and how different it feels to you is completely up to you, but definitely something to consider.
The Challenge of Including Military Service
Let’s talk about buybacks on military service and how that plays into all of this. So most of you know, if you’ve had military service, you can make a deposit or “buy your military service back.” It requires you to pay some money. You then get turn credit for your military time in the calculation of your first pension.
But in the environment we’re in right now with a reduction in force looming over the heads of millions of federal employees, and knowing how long it takes for military buybacks to be processed, you’re in a little bit of a conundrum if you haven’t already made your deposit.
In the event that that military service will make you eligible for a pension or if nothing else, giving you a higher pension formula, if you leave voluntarily or involuntarily and you have not had an opportunity to buy back that military time and complete that deposit, your pension will naturally be lower because it’ll have fewer years of service.
And like I mentioned, if that military service ends up making you eligible to retire and go out on perhaps a different method of retirement, you’re going to lose out on that as well. We are unfortunately in a situation where the likelihood that military buybacks are going to be able to be processed in time without some intervention from OPM.
I think we’re in a situation where military buybacks, if they haven’t already been completed, need to be removed from the thought process with respect to getting credit for those. Because the rule is that military buyback needs to be done prior to leaving federal service. If you get a notice that by April 30th you’ve got to go, you’re not going to have the time to be able to effectuate that military buyback if you haven’t already started the process.
High-3 vs. High-5
There’s another aspect of all of this. We get a lot of requests from employees to explain the high three versus the high five calculation, and if we believe that there will be a change to this part of the formula. The current legislation that is on the books to be considered the bill is referring to brand new people who are hired by the federal government and what the rules will look like for them.
The idea with the high three versus the high five is that for newly hired employees, they will be under the high five model, but existing employees as of the date of the legislation, will be under the high three. There’s all sorts of changes that can happen to legislation as it passes through the entire process, but as of right now, we’re not looking for a massive sweeping change for people who are already in government service.
Get Connected & Next Steps
I hope that that’s helpful. Of course, we want you to know all of your numbers. We do a lot of retirement training for federal employees, hundreds of classes with tens of thousands of employees each year. I hope that if you have not already come to one of our workshops, that you make the time to be able to do that. You can find all of that information on our website.
To be able to get connected to us, pull out that phone and text the word podcast to to 224-444-6144. We’ll be connected. You’ll have a list of all those training sessions that are available along with the replays of all of our webinars, podcasts, and of course our articles as well. Hopefully this is helpful to you and that you’ll subscribe to this podcast so you’re sure not to miss an episode.
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