Delivered on: Thursday, September 16, 2021
The High-3 Average Salary
A step-by-step guide to the real way your high-3 is calculated
- Understand the important role that your high-3 plays in your federal pension
- Determine specifically what kinds of pay count toward the high-3 (and which ones don’t!)
- Learn how changes to your pay (like pay raises, temporary promotions, overseas assignments and part-time service) affect this calculation
- Walk through a step-by-step calculation, so you know your number
Download Handouts: CLICK HERE
Register for our next 30-minute webinar: FedImpact.com/webinar
Find a comprehensive retirement workshop for your area: FedImpact.com/attend
Prefer to read instead? Below is a transcript from the video:
Hello everybody, and welcome to today’s webinar on the high-3 average salary. This might seem like a little bit of an elementary topic to talk about, but it is such a fundamental component to the pension that you have. I regularly talk with employees who legitimately have a misconstrued idea about how the high-3 is calculated. Because it’s such an integral part of that pension calculation, I wanted to be able to break some things down for you today, just so you’re really, really clear. In our audience today, we’ve got lots of different types of employees on. We’ll cover some of the different facets of the different types of employees when it comes to the high-3 calculation. But lots of you on today. So super excited for this. Like we always do in our webinars, we have our support teams to handing by.
In the Q&A area, if you have questions, please type them in. I’m going to stay focused on delivering today’s content. The team is going to be able to answer questions in the Q&A. All that I ask is that the questions that you submit to the support team are related to the high-3. If you have some question that’s been hanging out there that is on a totally unrelated topic, please save that for another time, because there are so many of you on today’s session. We want to make sure to get to all of the questions that are pertinent to this topic. We do have handouts available for download. Right next to the Q&A area you’ll see handouts. You can go ahead and download today’s material. Don’t worry if you happen to forget, or if you’re not really in a spot where you can download that easily, these will be emailed to you.
Same thing with the recording. We will send out a link to the replay once we have it all up and you’ll have that as well. Stay until the end, because we’re going to cover five of our most frequently asked questions that employees tend to kind of get hung up on for the high-3. In addition to the stuff we’re going to share with you today, we also want to make sure that you’re good to go all on those frequently asked questions. I’m your presenter today. My name is Chris with ProFeds. We’re really delighted to be able to provide all sorts of different types of training to federal employees, with respect to their benefits. I’m surrounded by a great team to be able to help you today as well. So today’s topic is all about the high-3 average, and I wanted to give a step by step guide to the real way that your high-3 is calculated.
Sometimes the way that government documents read, it’s not terribly clear. I’m sure you’ve come across that several times in your likely decades of service for the federal government. So we want to kind of break things down into layman’s terms so that it’s super clear how this calculation actually happens. For today’s agenda, we’re going to cover, of course, what the important role is that the high-3 plays specifically in your pension. It’s one thing to know how a number is calculated, it’s another thing to know how it affects you. I think it’s equally as important to know that last part. The next thing we’ll cover is to determine specifically what types of pay that you’re receiving count for the high-3 and maybe more specifically the ones that don’t.
I would hate for you to believe that a certain type of pay that you’re receiving is going to count in the calculation of your pension through the high-3, when in fact it doesn’t. We’re going to go through a laundry list of those different types of pay. Next, you want to learn how changes to your pay, even temporary changes to your pay, might affect your high-3 calculation. To do so, we’re going to walk through a step by step calculation so you are crystal clear. It’s important for me to share with you what this session won’t be. This is not some scientific calculation of your high-3.
Could I get into the weeds with you on that? Sure. But you’d probably fall asleep or just be really frustrated because of the way the government does math. I’m going to give you some of these general concepts and show you roughly what this is going to look like knowing that when it’s time for your agency to get into the super nitty gritty, like down to the day that your high-3 is calculated, it may be slightly off of what we’re going to show today, but you are going to be really honed into that ballpark of what that high-3 is going to be.
Again, we can go into those great details, but I tend to lose audiences when we do that, instead of talking about kind of the bigger impact that this number really has on you. That’s certainly the big learning point for today. So let’s start with the role that the high-3 plays in your pension. It is a critical part of that pension formula. You’ll see, we have the high-3 average salary with a big red arrow on it. Of course, other parts of that formula include your unused sick leave.
And of course, the number of years and months of service that you’re going to have included. So the high-3 being one of the variables that are put into the formula, it’s important that you understand what the formula is. I’ve chosen for today’s example to simply show the FERS formulas for regular employees. I know that we’re going to have plenty law enforcement officers here, firefighters, air traffic controllers. We might even have some CSRS employees. But the vast majority of you are going to be FERS. And we want to try to keep this as simple as possible from a concept standpoint. So we’re simply going to show the two FERS formulas for regular employees. But the same concept applies to the other formulas as well. So in the lower left hand corner, if you take a look at where it says regular FERS, 1.0% formula, this is the formula that FERS employees who are retiring under the age 62, or if you’re at least age 62 but have less than 20 years of service, this is the calculation you are going to use. It’s a very simple calculation.
We take the high-3 X 1% times the number of years of service that you have. And of course, we’re talking decimal places of years as well to include full months. We do that math and we come up with your pension. In the event that you are able to hang on until at least 62 and have at least 20 years of service, you get to use the formula on the right, which is slightly different. The only part of it that’s different is instead of putting the 1% formula, we use the 1.1% formula. Now I know when I first saw this many, many years ago, I thought, “God, what’s the big whoop? 1%, 1.1%.” But this is a 10% raise in your pension. So this is a mark in time that a lot of employees strive to meet so that they can get that higher calculation.
But you’ll see that the high-3 exists in both of these formulas and this will help you to be able to pencil whip what your pension is going to be roughly so that you can see the effect that your high-3 has on the pension. So let’s look at the basics of the high-3 calculation. The high-3 is the average of the highest three years or 36 months of consecutive earnings. And by executive earnings, we mean they all have to be together. You couldn’t have had a really great year 10 years ago and add it to the two years that you’re finishing up your employment with. They all have to be together. I do want to make a special note that they don’t have to be a full calendar year or a full fiscal year. So, for instance, your high-3 very well could be from July 31st, 2021 to July 31st, 2024.
So it can span over several years. The key is it simply has to be 36 consecutive months. Next step, the high-3 for most people, they earn this at the end of their career. This is a very natural career progression where you’re getting pay raises and step increases, maybe even promotions. But occasionally, we find folks who maybe took a step down in a position, they moved, whatever that might be and their highest three years of earnings were many, many years ago. But keep in mind when we’re thinking about the types of pay, all these earnings that we’re talking about, there’s certain types pay that count towards the high-3 and certain ones that don’t okay. We’re going to cover this here in a second, but this is bringing us to our very first step, which is to determine the types of pay that count for high-3 purposes. Before we start adding stuff together and getting averages and all that, we should probably make sure that we’re using the right numbers to begin with.
So if we take a look at the different types of pay that are included in the high-3, on the left hand side of the screen, you’ll notice that we also have an equally long list on the right hand side of pay that doesn’t count. Now I’m not going to go through each and every one of these. You all know the type of pay that you’re receiving. But a question we get a lot of is, “Well, what if I’m receiving a pay that’s not on this list? How do I know?”
We’re going to tell you exactly how to know whether a certain type of pay counts for the high-3 by cheating a little bit. We’re going to show you the exact formula to figure it out and that way you can look at your own pay stub and know for sure. So keep these in mind.
The things on the left hand side are obviously the ones that count and for those on the right, it’s great that you receive this pay, it just doesn’t help your high-3. Let’s say you came to us and said, “Hey, ProFeds, I went to that webinar that you did on the high-3, or I read one of your articles or I listened to your podcast, but I’m looking at my pay stub and I see two types of pay that aren’t on your list. Could you help me figure out whether these types of pay count or not for the high-3?” So I know that on webinars, depending on the size of the screen that you’re viewing from, it may be difficult to see this, but I want you to know this is a real life employee. We’re using this as an example.
Don’t worry, we don’t have any sensitive information on here, but I wanted to show some real world examples of how this can kind of be confusing. In the upper right hand corner in red, we’re showing what the actual numbers are that are appearing on the pay stub so that everybody can read it. So we have a regular pay amount of $3,586. We have a uniform allowance of about $8 and we have an incentive award for $1,000. And the question that this employee has is do those special types of pay, the uniform allowance and the incentive award, count for the high-3? Because it’s not on our list that we just reviewed, the question is how can we tell if those two types of special pay count for the high-3 purposes? The answer is to do the backwards math. And I’m going to give you a hint to how this works and then we’re going to show you an example.
The amount of pay that you pay into FERS each pay period, that whatever your percentage is, that’s only based on the type of pay that counts for the high-3. So the question really becomes, is what I’m contributing to FERS based on just my regular pay or does it also include those other types of pay? In this instance we’re looking at a uniform allowance and an incentive award. So the next question we have to ask ourself is, well, what percentage does that particular employee contribute to FERS each pay period? Well, if we have regular FERS employees, these are folks who are … there’s three different categories of them: employees hired prior to 2013 pay 0.8%, which is what this particular employee is. Anyone hired in 2013, we’re looking at 3.1% that they have to contribute a huge wallop to FERS that was enacted a few years ago.
And then employees hired 2014 or later, they have to contribute 4.4% into FERS every pay period. So crazy for those guys, but for the traditional FERS hired prior to 2013, we’re looking at just under 1% that you have to contribute. Now, if you happen to be a special provision employee, law enforcement firefighters, air traffic controllers, you’re part of the extra half a percent club, and you have to contribute that extra half a percent based on which category above you came in under.
I put the CSRS contributions on here as well. I’m not going to spend the time to walk through it, but you’ve likely known how much you’re contributing to your pension for a long, long time, but wanted to make sure this content was at least in here for you to reference.
Having known that, if we go back to our first example, having known that this employee contributes 0.8% of their pay each pay period into FERS, now we have to look at the part of the pay stub to see what the dollar amount is that’s being contributed. So if we look at that pay stub, you’ll see a line that says “Retire, FERS,” and it shows that this employee has contributed $28.69 per pay period into FERS. So the question we have to ask ourselves, “Is that $28.69 is 0.8% of what number?”
And like I have in parentheses here for all the number nerds out there, the equation is $28.69 equals 0.8% of X. So we’ll show you how that calculation’s going to happen here in a second. We’re going to show an example on the right hand side, but first let’s go through the basics again. We’ve got a regular pay of about $3,586 on the pay stub. We have a uniform allowance of $8 and some change and incentive award of $1,000. And that employee contributes $28.69 a pay period into FERS. None of this is new information. We’ve already covered this, but we wanted all these numbers to be handy because it will help us to do the math. Here’s the backwards math. On the right hand side, we’re going to take that $28.69 and we’re going to divide it by 0.8% and that’s going to give us about $3,586 a pay period. We’re off by a couple of cents, but good government rounding never hurt anybody, I guess.
So we’re looking at that $3,586. Well, if we look to the right hand side, that’s just the regular pay. So that 0.8% was only taken from the regular pay that this employee is receiving, which by default means that it wasn’t taken from the uniform allowance and it wasn’t taken from the incentive award. So we know that those special types of pay aren’t being included in the high-3 calculation because they’re not considered for retirement purposes.
When we’re deciding the dollar amount to give ourselves credit for high-3 purposes, we’re going to take the pay period amount and get an annual figure. So we’re going to take that $3,586, we’re going to multiply that times 26 pay periods and we come up with $93,236 per year.
Had those special types of pay counted for the high-3, you would’ve seen the dollar amount that they’re contributing into FERS, be based off that in entire amount that they’re receiving in that pay period. But in this case that’s not happening. So we know it’s great that you got the incentive award, it’s great that you’re getting a uniform allowance, but for high-3 purposes, we’re looking at $93,236 a year for this pay range that you’re in. The next step in the calculation is to figure out what this timeframe is of your highest earnings. Like I said, most of the time it’s at the end, but sometimes it’s not. Even at the end, this can get a little bit tricky. So follow along with me. So we’ve got this long blue line that’s the length of your whole career.
Most oftentimes the high-3 years of earnings are right at the end. So we’ve marked that part of the line in red and indicated that the high-3 is at the end. However, sometimes that high-3 happened many years ago. So wherever it happened, it doesn’t matter where it happens or when, we just want to know that we’re using the right dollar amounts to determine where the highest three years of earnings are and then we have to know how the calculation works. So when we isolate those high-3 years of earnings, to make this kind of simple, we want to use an example to show you how the numbers really play out. For our example, we’re going to say that your highest three years of eligible earnings were at the end of your career and that you planned to retire on December 31st of this year, 2021, but you heard that you should wait until January of next year to retire because we’re due for a big pay raise.
So that’s going to change your high-3 big time. At least that’s what you’ve heard. So we’re going to shed some light on that idea here in just a moment. But for now, let’s assume in this example that you are in fact going to retire December 31st, 2021. We have to take that next step to actually calculate the high-3 average. Here’s how it goes. If you retire at the end of this year, this is a really easy calculation, because if we’re at an end of a year, it makes all the numbers pretty easy. But we’re going to take the pay from 2019, 2020, 2021, we’re going to add all of those 36 months together and divide by three. So we come up with a high-3 average of $91,841.
Like I said, these are rough numbers, pay years don’t always end on December 31st and start on January 1st. So your HR will dial this in a little bit closer, but this is pretty spot on. So this is what the high-3 looks like if you do what you say you’re going to do and retire at the end of this year. But what about that scuttlebutt that you heard at the water cooler. You’re thinking, “Huh, well maybe if we are having a big pay raise in January, I should wait. I bet that will make loads of difference in my high-3.” Well, let’s see. If you retire January 31st, 2022, it’s essentially shifting that timeline of the 36 months that we’re calculating forward by one month. So in 2019, we’re only going to calculate 11 of those months. Of course, all of the months in 2020 and 2021 and then one month of 2022.
We’re going to take the pro-rated amount from each year. So 11 months of pay from 2019, all of the months from 2020 and 2021 and then the one month of pay from 2022. We’re going to add all of those together and divide by three. We’re still adding 36 months of pay. It just happens to overlap four years. We add all that together and we come up with a high-3 of $92,009. This is $168 of a difference in your high-3. Did it affect your high-3? Yes, of course it did. The longer that you work and the higher pay that you earn, of course that’s going mean to positively affect your high-3, but it’s not some magical transformation of your high-3 that many folks will lead other employees to believe. So just remember, you only get credit for the month in which you actually work.
You don’t get credit as if you had worked the whole year with that higher pay. Of course, all of you have some different retirement formulas, the pension formulas for your specific retirement system and the type of employee that you are. Aside from trying to complicate matters and plugging the high-3 into all of these different types of pension formulas, just know that you need to look at the pension formula that applies to you in your situation and be able to plug that high-3 in along with your service years and your sick leave time, and then the percentage that applies for you. So let’s review the step by step calculation. Step number one is you have to figure out what types of pay you’ve received and do they count for high-3 purposes? Step two, figure out that timeframe of where those highest earnings were of the qualified earnings for high-3.
The third step is to actually calculate that high-3 average based on the 36 months where your highest earnings were all together, and then step four, plug that high-3 in to the pension formula for your specific retirement system. Like I mentioned at the beginning, I wanted you guys to stick around because we have some frequently asked questions. Of course, we get tons of questions, but these are pretty common ones that we hear even after we’ve gone through a pretty lengthy explanation of the high-3. So let’s cover those frequently asked questions. The first is, if I get a temporary promotion, does that count for my high-3? The answer is yes. As long as you were in your highest three years of earnings when that temporary promotion happens, then absolutely, that extra pay will count for your high-3.
Let’s say you get a temporary promotion for three months, that would account for three of the 36 months that you’re including in that calculation. So it certainly doesn’t hurt you, but it can certainly help you. Next question: if I take a job overseas for my last three years, does that hurt my high-3? So if you, again, are in your highest years of earnings, what you’re doing is your suppressing your high-3 from continuing to go up because you’re going to lose that locality pay. You give up locality pay in the States to go over and get overseas COLA, which might look about the same dollar amount and maybe even more, but it doesn’t count for the high-3. It’s not that you’re making your high-3 go down, it’s that you’re keeping it from going up.
I had a gentleman years ago who was in Houston, one of the highest locality pay in the country, those areas and he was considering taking a job in Kuwait and retiring out of Kuwait. And while it sounded good, he’s like, “Listen, I’m not married, I don’t have kids. The job sounds fun. I want to go do it.” And I’m like, “Cool. That sounds great. But I’d love for you to know ahead of time what effect this actually has on your pension, so that you don’t make a misstep that you regret.” And he’s like, “What do you mean?” I ran the numbers and showed him how much his pension would be different by not allowing his high-3 to continue to grow for those … he was actually going for five years. So there was five years of stifled high-3 growth that he wasn’t going to get, all because he gave up the Houston locality pay to get overseas COLA that does not count.
Next question: if I move from a high locality pay area to an area that’s much lower in locality pay, is my high-3 going down? This answer is similar to the previous answer on going overseas in that it’s so much that your high-3 is going down, it’s that it’s not continuing to go up. So ultimately, you’re going to have a high-3 that will be lower than had you stayed in that higher locality pay area.
But the opposite of this happens, too. So if I moved to a high locality pay area for just one year, does that pay still count for the high-3? And the answer is yes. Remember that high-3 is the 36 months of consecutive earnings. So that higher pay that you’d be receiving in that final year of work will count for 12 of the 36 months that are in the high-3 calculation. Next question: here’s one we have received for years. There’s been talk of the high-3 changing to be the high-5. How likely is this to change? This idea of the high five has been floating out there for decades. And every time this reaches either house of Congress, they are met with heavy pushback. And the reason is, is because current workers have been told that their pension that they’ve been working for all these years is calculated a certain way, and now they’re going to change it.
So all these unions, and lobby firms and everything, they are like all over Congress when they look to change the high-3 to the high-5. Of course, it’s always possible that it’s going to change, but like with anything, the stroke of the congressional pen changes quite a bit. But I want to give you some perspective of what happens when these negotiations take place. So years ago, this idea of the high-5 was in Congress and Congress was like, “Listen, we’ve got to have more money in the pension fund. We can’t keep paying out all these higher benefits. We need to move to the high-5.” And keep in mind the high-5, even though the number’s bigger, it may means that we’re taking lower years of earnings into the average. So it’s going to lower that high-5 calculation that’s being used in the pension calculation.
So when they got all this pushback of yanking out the rug from under the current workers who have been told that their pension’s calculated using the high-3 for all these years, what they decided to do was instead to change how new employees are treated. And that’s why earlier in today’s presentation, you saw that employees hired in 2013, and certainly 2014 and later, have to contribute a lot more to the pension program to get the same benefit that everyone else has been receiving at the lower contribution level. So sometimes when Congress wants a certain thing, there are a couple ways to skin that cat and they found another one. The good news is at least with new employees that are being hired, they’re being hired with the understanding that this is how it works. This is what is expected of you to contribute to the system and this is what you’re going to get, versus really messing over a lot of folks that are about ready to retire and upsetting that apple cart.
So it always helps when that’s happening around election time. They certainly don’t want to alienate a lot of their constituents, but this was a negotiation within Congress to avoid going high-5. So I suspect we’re probably not going to hear a whole lot of the high-5 challenge in Congress or from Congress, because they were able to get a lot of what they wanted with that modification. So hopefully those frequently asked questions are helpful to you with a little bit of peek behind the curtain of how all that stuff works. For today’s handouts and the replay, of course, they will be available for download. Get them before you hop off this webinar, if you want them right now, otherwise we will email them to you along with the link to the replay.
Like we do with every webinar, we’ll let you know what the next session is going to be all about. And we’re going to talk about a super popular topic that employees love, which is the Special Retirement Supplement. So this session will be on October 14th, at one o’clock Central. We’re going to talk about this unique benefit for select FERS employees, not all of them get it. So it’s important that if you’re thinking you’re going to receive this benefit that you’re on this select list and you know exactly how this is calculated. You can sign up for that webinar, just like you did for today’s at fedimpact.com/webinar. I almost stayed within the 30 minutes this time. There’s always so much to talk about, but I appreciate you guys sticking with us today. And I’m sure all the great questions that you’ve submitted.
Of course, we’ve got our next webinar, like I mentioned on October 14th. And if you are wondering, “Well, if I learn this much on the high-3 today, what else do I need to brush up on?” That’s exactly where you come to one of our workshops. So we hold full day sessions. You can find the list of all of the workshops available, both live and virtual at fedimpact.com/attend. So I hope that you’ll join us both at the next webinar and at a workshop near you. And we’ll see you next month for our topic on the Special Retirement Supplement. Thanks!
Register for our next 30-minute webinar: FedImpact.com/webinar
Find a comprehensive retirement workshop for your area: FedImpact.com/attend