How is My Federal Pension Calculated?
The federal pension, sometimes referred to as an annuity, is one of the greatest retirement benefits a federal employee will receive. The government will pay a monthly pension benefit to the employee when they meet eligibility requirements and separate from service. The benefit will adjust each year with inflation and may even offer survivor benefits if the employee elects. Whether an employee is under the Civil Service Retirement System (CSRS) or Federal Employee Retirement System (FERS), the formula to calculate the annual total benefit looks like this: Highest 3-year average salary x years of creditable service x a pension multiplier. While this formula looks simple on the surface, the components are a little more complex. Let’s explore each below:
1. High-3 average salary: This refers to the highest 36 consecutive months of basic pay. While many workers receive their highest pay towards the end of their service, this could be at any point throughout an employee's career. Many workers will look at their high-3 calculations before they retire to determine the impact of a potential pay raise on retirement benefits. Base salary and locality pay are included in the calculation, but overtime, bonuses, and travel pay are not.
2. Creditable service: This refers to the total amount of time the government will count towards your pension calculation. The primary driver will be the number of years an employee worked from their start date to their separation date. Any unused sick time or bought-back military service will be added to this number. Unused vacation is not included in the creditable service calculation and is often paid out as a lump sum at retirement. It is important for workers to know this calculation and ensure the government includes all creditable services in their pension benefit.
3. Pension multiplier: This refers to a multiplier the government adds to the pension calculation based on specific eligibility requirements. For employees under FERS, the multiplier is 1.0% if retired before age 62 and 1.1% if retired after age 62 with 20 years of service. The CSRS multiplier is tiered using 1.5% for the first 5 years of service, 1.75% for the next 5 years, and 2.0% for all remaining years.
4. Pension reductions: While receiving a pay raise or working an extra year can permanently increase an employee’s pension benefit, some considerations could permanently decrease the benefit as well. If the employee decides to retire early under MRA+10 eligibility and take an immediate pension, their monthly benefit will be reduced by about 5% per year under age 62. Another common reduction occurs if an employee elects to receive a survivor benefit for a spouse, which could reduce the overall benefit by as much as 10%. Although this could be beneficial to a couple’s overall retirement objectives.
The federal pension often drives government workers’ retirement decisions, and small changes to either of the calculation components could equate to vastly different retirement outcomes. You can contact your agency’s benefits office to get an estimate for what you can expect to receive as a monthly benefit. The advisors at SCO Wealth Management understand how the pension works and can show you where small changes have the biggest impact on the rest of your retirement plans. Please use us as a resource for your questions or schedule a complimentary review of your retirement plans.
1. High-3 average salary: This refers to the highest 36 consecutive months of basic pay. While many workers receive their highest pay towards the end of their service, this could be at any point throughout an employee's career. Many workers will look at their high-3 calculations before they retire to determine the impact of a potential pay raise on retirement benefits. Base salary and locality pay are included in the calculation, but overtime, bonuses, and travel pay are not.
2. Creditable service: This refers to the total amount of time the government will count towards your pension calculation. The primary driver will be the number of years an employee worked from their start date to their separation date. Any unused sick time or bought-back military service will be added to this number. Unused vacation is not included in the creditable service calculation and is often paid out as a lump sum at retirement. It is important for workers to know this calculation and ensure the government includes all creditable services in their pension benefit.
3. Pension multiplier: This refers to a multiplier the government adds to the pension calculation based on specific eligibility requirements. For employees under FERS, the multiplier is 1.0% if retired before age 62 and 1.1% if retired after age 62 with 20 years of service. The CSRS multiplier is tiered using 1.5% for the first 5 years of service, 1.75% for the next 5 years, and 2.0% for all remaining years.
4. Pension reductions: While receiving a pay raise or working an extra year can permanently increase an employee’s pension benefit, some considerations could permanently decrease the benefit as well. If the employee decides to retire early under MRA+10 eligibility and take an immediate pension, their monthly benefit will be reduced by about 5% per year under age 62. Another common reduction occurs if an employee elects to receive a survivor benefit for a spouse, which could reduce the overall benefit by as much as 10%. Although this could be beneficial to a couple’s overall retirement objectives.
The federal pension often drives government workers’ retirement decisions, and small changes to either of the calculation components could equate to vastly different retirement outcomes. You can contact your agency’s benefits office to get an estimate for what you can expect to receive as a monthly benefit. The advisors at SCO Wealth Management understand how the pension works and can show you where small changes have the biggest impact on the rest of your retirement plans. Please use us as a resource for your questions or schedule a complimentary review of your retirement plans.