Edward A. Zurndorfer, CFP

All retiring federal employees -- those covered by the Civil Service Retirement System (CSRS), CSRS-Offset, the Federal Employees Retirement System (FERS), or a combination of CSRS and FERS ("trans" FERS employees) will receive a CSRS and/or FERS annuity that is computed based on their length of federal service and their high-three average salaries. This column discusses what the high-three average salary is and how it is computed.

The high-three average salary is the largest annual rate  resulting from averaging an employee's basic pay in effect over any period of three consecutive years of creditable civilian service, with each rate weighted by the length of time it was in effect.  Each year's an employee's basic pay is shown on the employee's SF 50 (Notice of Personnel Action).  The three-year period in which the average pay is computed starts and ends on the dates that produce the highest average pay. Note that the period need not start on the first day of the month or the date of a pay change.

To determine the beginning date of the three year period, follow these steps:

Step 1. If the employee's retirement date is something other than the last date of the month, add one to the day of the month. If the employee retires on the last day of the month, use that day.

Step 2. Subtract three years, zero months and zero days from the retirement date in Step 1 (year-month-day).

Note: In computing retirement benefits, the Office of Personnel Management (OPM) uses a 30 day per month / 12 months per year calendar or a 360 day a year calendar.

Here are two examples that will illustrate:

Example 1.

Carol plans to retire from federal service on Dec. 31, 2008. The beginning date of her three year period is December 31, 2005, as shown here:

Example 2.

Jean plans to retire from federal service on Jan 3, 2009. The beginning date of her three year period is January 4, 2006, as shown here:

An exception to using the employee's salaries coinciding with the last three years of federal service occurs when the employee had higher pay rates during a prior three year period of service. Then the latter three year consecutive period should be used.

The three years of service used for the high-three average salary calculation need not be continuous, but must be a consecutive period of service. Two or more separate periods of employment may be combined provided there is no intervening service. Consider the following example.

To compute the high-three average salary, the periods 6-22-1999 to 5-21-2000 and 10-15-2006 to 11-14-2008 are used to equal three years, 0 months and 0 days  total time of service.

Service that is creditable for entitlement purposes - but not for computation purposes may be used in determining the high-three average salary. This type of service includes:
(1) Temporary CSRS service time on or after Oct. 1, 1982; or (2) CSRS service time ending on or after Oct. 1, 1990 for which employee retirement deductions - approximately seven percent of the employee's salary - were refunded and not re-deposited.

The following types of salary are included in the computation of an employee's high three average salary. Salary can include various types of pay for which retirement deductions are withheld:

1. regular pay;
2. locality pay (Note: Under Public Law 111-84, the National Defense Authorization Act of 2009 passed into law on October 28, 2009, non-foreign area COLAs will be replaced by the locality pay formula used in the contiguous 48 states. Beginning in calendar year 2010, those employees now covered by non-foreign area COLAs would receive one-third of the locality rate paid in the rest of the U.S. In 2011, two-thirds would be paid. And from 2013 on, the full comparability adjustment would be made. To protect take-home pay, these employees will continue to receive non-foreign area COLAs, but they will shrink each year until the employees' post-tax pay is equal to or higher than what their take-home pay would have been if the transition hadn't taken place);
3. environmental differential pay;
4. premium pay for standby time;
5. law enforcement availability pay; 
6. night differential pay for wage grade employees only; and 
7. special pay rate for recruiting and retention purposes.

The following types of pay are not included in the computation of the high-three average pay: 

1. a lump sum payment for accrued and accumulated annual leave;
2. bonuses and overtime, holidays, Sunday premium and military pay;
3. general schedule night differential pay and foreign of non-foreign post differential pay;
4. travel allowances;
5. recruiting or retention bonuses
6. geographic post differential - - these were cost of living allowances for employees working an Alaska and Hawaii paid prior to October 28, 2009;
7. payment for credit hours; and
8. retroactive pay granted to a retired or deceased employee pursuant to a wage survey.

The salary that is used in calculating the high-three average salary is shown for each relevant year on the employee's SF-50 Because an employee's salary may change in the course of a leave year - for example, a step increase - more than one SF-50 in any leave year will be needed to calculate the high-three average salary. Here are the steps used in calculating it.

Step 1.  Enter the annual salary/rate of pay for the time period.
Step 2.  Multiply the annual rate/salary by a time factor* by the annual rate for the basic pay.
Step 3.  Add the entries in the total basic pay column.
Step 4.  Divide the sum of the basic pay in step 3 by 3 to determine the high-three average salary.

The table below is used to calculate the high three average salary, together with an example.

*360 day factor chart available from OPM's CSRS and FERS retirement handbook at www.opm.gov/retire/pubs/handbook/C050.pdf (Chapter 50, page 50)

** Retirement date

About the Author

Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, Maryland. He is also a registered representative with Multi-Financial Securities Corporation (Branch A9X), member FINRA/SIPC, also located in Silver Spring, Maryland

Related Articles & Resources

·  Best Date to Retire - CSRS and FERS: 2009 and 2010