Using the high-5 would mean a lesser annuity, compounded through smaller COLA adjustments. Image: lovelyday12/Shutterstock.com
Every time Congress tries to save money, as the House of Representatives now says it wants to do, there seems to be a proposal for the annuities for federal employees who retire after some future date to be based on the retiring employee’s highest five consecutive years of average basic pay rather than their highest three years currently used.
While I can’t predict whether legislation will be introduced to do that, what date any such bill would set as the cutoff, or would be passed by Congress, or signed into law by the President, I thought it would be a good idea to see what difference it would make.
Let’s say your current salary is $60,000 and you will become eligible to retire, and want to do so, in five years with 30 years of service at that time. Let’s also assume that you will receive pay raises during your next (last) years of work of 3 percent per year, all the potential types of raises combined. (Note: You can easily substitute other figures for any of these; the key is to understand how this works.)
Under these assumptions, your salary for those five years would be $60,000, $61,800, $63,654, $65,564 and $67,530. Using a high-3 salary base, only the average of the last three years, $65,583, would be used for calculating your annuity. But including all five years for a high-5 base, the figure used would be $63,710.
Here’s how that would translate into a difference in the annuity remember that this is just one illustration, based on the above assumptions):
If you were a FERS employee retiring before age 62, the difference in your starting annual annuity between using the high-3 base and a high-5 base would be $19,675 vs. $19,113 – $562. If you were to retire at age 62 or later with at least 20 years of service—pertinent here because we’re assuming 30 years—the figures would be $21,642 vs. $21,024, a difference of $618.
If you were a CSRS employee, the difference in your starting annual annuity between using the high-3 base and the high-5 base shown above would be $36,890 vs. $35,837 – $1,053.
Those differences would not only continue year after year through your retirement but also would compound, because each year’s cost-of-living adjustment (COLA) would be added to smaller amounts.
That’s why you should keep a weather eye out for any move by the Congress to change your annuity calculation from the current high-3 to a high-5. It really would take money out of your pocket.
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See also,
Legal: How to Challenge a Federal Reduction in Force (RIF) in 2025
The Best Ages for Federal Employees to Retire
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Primer: Early out, buyout, reduction in force (RIF)
Retention Standing, ‘Bump and Retreat’ and More: Report Outlines RIF Process