This column discusses the calculation of a retiring FERS employee’s starting FERS gross annuity. OPM’s Retirement Office calculates the starting FERS gross annuity.
The three factors used by OPM’s retirement office in the calculation of the starting FERS gross annuity will be explained.
SEE ALSO: High-3 Average Salary: What Is It and How Is It Calculated?
These three factors are: (1) Length of service; (2) High-three average salary; and (3) Accrual factors (1 percent, 1.1 percent, or 1.7 percent). Factors (1), (2) and (3) are multiplied together resulting in what is called the starting FERS gross annuity. In future years, the starting FERS gross annuity will be eligible for cost-of-living adjustments or COLAs.
Note that once OPM’s Retirement Office calculates the FERS gross annuity, the gross annuity can be reduced because of: (1) Age (for example, a FERS employee retires under the “MRA + 10” retirement and starts receiving his or annuity before age 62; for every year the FERS employee is under age 62 in the year the annuity starts, the starting FERS gross annuity is reduced by 5 percent; (2) Survivor annuity benefit cost (for example, a retiring FERS employee elects to give the maximum spousal survivor FERS annuity benefit resulting in a permanent reduction of 10 percent of the starting FERS gross annuity).
Determining Length of Service
A FERS employee’s service computation date (SCD) for retirement incorporates the employee’s service time that is creditable towards both the employee’s eligibility to retire as well as in the computation of the FERS annuity. Added to the length of service is the employee’s converted unused sick leave hours on the day of retirement. In general, an employee’s SCD for retirement is the employee’s hire date into permanent Federal service, adjusted back in time for deposits for temporary or military service, or forward in time for extended periods of leave without pay or breaks in service.
A “Trans” FERS employee’s (a “Trans” FERS employee was a CSRS employee who voluntarily came into FERS after being a CSRS employee for a minimum five years). The SCD for retirement for a “Trans” FERS employee is the date that the employee switched to FERS after working at least five years under CSRS. “Trans” FERS employees also get credit for unused sick leave hours as follows: The employee must find out his or her unused sick leave balance at the time of transfer to FERS and his or her unused sick leave balance on his or her retirement date. The lower of these two balances will be used in the CSRS annuity component calculation, while the difference of the two in the sick leave balances will be used in the FERS annuity calculation. The following chart may be used to determine a FERS employee’s length of service:
1 OPM uses a 30 day a month, 12-month a year calendar
2 The sick leave conversion chart may be found at: https://www.opm.gov/retirement-services/publications-forms/csrsfers-handbook/c050.pdf#page=58, page 51
3 In calculating the FERS annuity, OPM uses years and months only
The following example illustrates how the length of service is calculated for a retiring FERS employee with unused sick leave.
Example 1. Judith retired on Dec. 31, 2022 at the age of 58 with 1,300 hours of unused sick leave. Judith’s SCD for retirement is Nov. 13, 1992. Her length of service for computing her FERS basic annuity is computed using the above chart.
1 33 days = 1 month and 3 days with 1 month carried over to the month column
2 For purposes of FERS annuity computation, 30 years and 9 months is used. The leftover 3 days are lost and not used in the calculation of Judith’s FERS annuity.
The following chart is used to determine a “Trans” FERS employee’s length of service used in the computation of the FERS annuity component:
1 OPM uses a 30 day a month, 12-month a year calendar
2 Unused sick leave hours equal to difference between sick leave balances on day of transfer to FERS from CSRS and day of retirement
3 In calculating the FERS annuity, OPM uses years and months only
The following example illustrates the length of service determination used in the calculation of the FERS annuity component of a “Trans” FERS employee:
Example 2. Charles, age 66, retired from Federal service as a “trans” FERS employee on Dec. 31, 2022. Charles transferred to FERS on August 12,1998 with a sick leave balance of 500 hours. When he retired on Dec. 31,2022, Charles’ sick leave balance was 1,800 hours. Charles’ length of service for computing the FERS annuity component of his retirement is done using the above chart:
High 3 Average Salary
The second step in calculating a retiring FERS employee’s FERS annuity is to determine the employee’s high-three average salary. A previous column discusses how the high-three average salary is calculated.
FERS Annuity Calculation Formula
The last step in calculating a retiring FERS employee’s FERS annuity is to obtain the appropriate accrual factor (1 percent or 1.1. percent) chart. This is because the general formula for computing the FERS annuity is:
1. If a FERS employee retires before age 62 with any number of years of service, or if a FERS employee retires at age 62 or older with fewer than 20 years of service, then the formula for calculating the starting FERS gross annuity is:
1 percent x high-three average salary x total years and months of service
2. If FERS employee retires at age 62 or older and has at least 20 years of service (including CSRS service as a “Trans” FERS employee), then the formula for calculating the FERS annuity is:
1.1 percent x high-three average salary x total years and months of service
The 1 percent accrual factor table may be found here (page 57)
The 1.1 percent accrual factor table may be found here (page 58).
Special Provision Federal Employees
A different formula for computing the starting FERS annuity applies to Special Provision Employees who include: (a) Law Enforcement Officers; (b) Firefighters; and (c) Air Traffic Controllers.
The formula is as follows:
[1.7 percent x high-three average salary x first 20 years of service] plus [1.0 percent x high-three average salary x remaining years of service (including unused sick leave)]
The 1.7 percent accrual factor table may be found here (page 16).
The following examples illustrate the calculation of the starting FERS annuity:
Example 3. Amanda retired from federal service as a FERS employee on December 30,2023 at the age of 60 with 22 years of federal service. At the time of her retirement Amanda had 6 months of unused sick leave and her high-three average salary was $127,500. Amanda’s starting FERS annuity was calculated as follows:
1.0 percent x $127,500 (high-three average salary) x 22.5 (22 years of service plus 6 months unused sick leave) equals $28,688.
Note the following: (1) Amanda will receive the same $28,688 FERS gross annuity with no COLA through the year she is age 62; and (2) Amanda is eligible to receive the FERS Special Retirement Supplement annuity until the month she becomes age 62.
Example 4. Paul retired from federal service as a FERS employee at age 64 on Dec. 31,2022. At the time of his retirement, Paul had 25 years and 3 months of service with 10 months of unused sick leave. Paul’s high-three average salary was $150,000. Paul’s starting FERS annuity was calculated as follows:
1.1 percent x $150,000 (high-three average salary) x 26.0833 (25.25 years of service plus 0.8333-year unused sick leave) equals $43,037.
Note the following: (1) Paul was eligible for his first FERS COLA on January 1, 2024; and (2) Because Paul retired after age 62, he was not eligible to receive the FERS Special Retirement Supplement annuity.
Example 5. Samantha retired from federal service as a FERS employee at age 62 on Dec. 31,2023. At the time of her retirement, Samantha had 19 years and 5 months of service with 7 months of unused sick leave. Samantha’s high-three average salary was $87,400. Samantha’s starting FERS annuity was calculated as follows:
1.1 percent x $87,400 (high-three average salary) x 20.0 (19.42 years of service plus 0.58-year unused sick leave) equals $19,228.
Note the following: (1) Samantha will be eligible for her first FERS COLA on January 1, 2025; and (2) Because Samantha retired at age 62, she was not eligible to receive the FERS Special Retirement Supplement annuity.
Example 6. Howard retired from federal service under FERS as a Law Enforcement Officer (LEO) at age 48 on June 30,2023. At the time of his retirement, Paul had 25 years and 3 months of service as a LEO and 8 months of unused sick leave. Howard also made a full military deposit for 3 years of active-duty military service. Howard’s’ high-three average salary was $175,000. Paul’s starting FERS annuity was calculated as follows:
[1.7 percent x $175,000 x first 20 years of LEO service] plus
[1.0 percent x $175,000 x 8.92 (5.25 years of LEO service plus 3 years of bought-back military service plus 0.67-year unused sick leave) equals $75,104.
Note the following: (1) Howard as a retired LEO was eligible for his first FERS COLA on January 1, 2024; and
(2) Because Howard retired as a LEO, he is eligible to receive the FERS Special Retirement Supplement annuity until the month becomes age 62.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019