Your retirement benefits are an essential component of your total pay package as a federal employee. After years of devoted service to the government, the Federal Employees Retirement System (FERS) is intended to give you a stable financial future. 

However, there are few resources as effective as the Thrift Savings Plan (TSP) for federal employees in their search for financial security and stability. The TSP is a retirement savings and investment plan designed exclusively for federal employees, and it was established in 1986.

Retirement planning for federal employees requires an understanding of the High-3 and High-5 annuity calculations. Working with trustworthy annuity service providers and selecting the appropriate annuity strategy can have a big influence on your long-term income, security, and financial peace of mind.

So as to help you prepare for retirement and optimize your benefits, this blog will help you examine all of the many facets of FERS.

For federal employees, the years of salary applied to calculate the average basic pay for retirement benefits is what distinguishes a High-3 annuity plan from a High-5. While High-5 takes the highest five straight years of earnings, High-3 uses the average of the highest three. 

For most retiring employees, a High-5 computation would probably provide a smaller annuity than a High-3, which might result in a reduction of several percentage points in the monthly retirement payout. However, lower-earning years would be included in the computation, moving from a High-3 to a High-5 retirement plan. 

Also, for federal employees, it would probably result in reduced annuity payouts over time. Although the cost-of-living adjustment (COLA) will be applied to the annuity annually, the annuity will rise less each year since the COLA’s original base will be less. 

As suggested by the financial advisors in Puerto Rico, some employees would receive promotions in their final five years of government employment. On the other hand, others would gain from one or more step rises, while multiple workers would be exceeded, meaning they won’t receive any pay increases above the yearly cost of living.

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Assume that you now make $60,000 and that, after 30 years of service, you will be entitled to retire in five years, if you wish. Suppose you will receive a salary increase of 3% annually for the previous year’s employment, taking into account all possible raises. Remember, you can simply replace any of these figures with another one. Furthermore, the most important thing is to know how it works.

Based on the mentioned figures here, your pay would have been $60,000, $61,800, $63,654, $65,564, and $67,530 during those five years. With a high-3 salary basis, your annuity would be calculated using simply the average of the previous three years, or $65,583. On a high-5 basis, however, the total amount used would be $63,710 for all five years.

Again, the initial annual annuity difference between utilizing the high-3 base and a high-5 base, if you were a FERS employee retiring before the age of 62, would be $19,675 vs. $19,113—$562. Therefore, the statistics would be $21,642 vs. $21,024, a $618 difference, if you were to retire at the age of 62 or later with at least 20 years of service, importantly, here since we are assuming 30 years of service.

Read Also: 7 Mistakes To Avoid That Will Not Ruin Social Security Benefits

As suggested by the best annuity consultants in Puerto Rico, the defined-benefit annuity of FERS requires federal civilian workers to contribute a portion of their salaries to be eligible for future benefits. Because of recent changes in federal legislation, the amount of this contribution has altered to some extent. 

However, the pension scheme for Executive Branch personnel remains unchanged from its initial implementation in 1987; this legislation simply altered the contribution amount. Annuity consultation service providers in Puerto Rico say that retiring now would lock in the FERS pension amount, which was calculated using the optimum salary average.

Moreover, it is likely to be applicable for people who resign from the federal government on or after a specific date. However, if your rate of pay remains the same or rises throughout the extra years you work, you will not only increase the amount of creditable service that is considered in your FERS calculation, but you will also boost the average itself.

The basic benefit plan is the first of the FERS’s three components. You get a certain amount through this component of the plan. 

It is determined by your length of time working for the federal government and your three years of earnings in a row. However, your retirement benefits from the basic benefit plan are unaffected by the amount you paid. 

Here are some of the considerable federal retirement benefits for you:

1. Pension Benefits

The Federal Employee Retirement System (FERS) and the Civil Service Retirement System (CSRS) are the two genuine federal employee pension plans. Only federal employees who started their service before 1st January 1984, are on CSRS; the majority of federal employees are currently on FERS. 

The annuity paid is equal to a percentage of the average of the three highest-earning years of work or services made available to federal employees under CSRS. Although FERS’s pension is a smaller proportion of their high-three, it is combined with Social Security payments and the government’s 401(k)-like TSP.

2. Social Security

The second component of the FERS retirement income triangle is Social Security. You receive 6.2% of each paycheck from the federal government. Furthermore, your retirement is funded by 12.4% of each wage, which is matched by the government. It’s more difficult for CSRS personnel, who should check their eligibility for Social Security with a financial advisor who specializes in government retirement planning.

In order to receive Social Security payments, which are based on their greatest 35 years of earnings, FERS retirees must have endured 40 quarters of service. Although it is officially considered early retirement, they are able to start receiving Social Security at age 62. Up to age 70, when it reaches its maximum, the payout amount increases by a percentage each year. 

3. Thrift Savings Plan

One of the most significant and advantageous financial planning is the TSP. Despite being one of the most basic 401(k) plans, if used properly, it can be a very effective way to save for retirement while you’re still working. The primary cause of this is the matching contribution: if you contribute that amount to your TSP, the government will match up to 5% of your monthly salary.

The TSP is the final benefit. It comprises five main funds of the government’s 401(k) plan: 

• G Fund (Government Securities Investment Fund)
• F Fund (Fixed-Income Investment Index Fund)
• S Fund (Small-Capitalization Stock Index Fund)
• I Fund (International Stock Index Investment Fund)
• C Fund (Common Stock Index Investment Fund)
• L Fund (Lifecycle Funds)

The above-mentioned lifecycle funds are a combination of all the basic funds and are designed to be allocated only after a certain period of retirement.

Read Also: Everything Retirees Need To Know About Tax Brackets in 2025

In the history of the FERS, the last couple of days have been quite unique. However, it might be difficult for you to know how to proceed when it comes to selecting the best plan before your retirement. There are a number of federal retirement and health benefit choices that should be considered, according to the National Active and Retired Federal Employees Association. 

The House Budget Committee recently released a few lists of options that are being seriously considered. These include raising contributions to the FERS without providing any additional benefits. Decreasing the rate of return on the fund of the TSP and restricting the government’s contribution to health benefits through the Federal Employees Health Benefits program. Consequently, it might result in a significant increase in personal costs for both employees and retirees.  

Summing up, federal employees have a better chance to make informed retirement decisions when they are aware of the distinctions between High-3 and High-5 annuity estimates. By concentrating on your highest-earning years, the High-3 method—currently employed under FERS—generally provides an additional pension. 

You can optimize your retirement benefits and ensure a safe financial future by selecting the appropriate calculation and working with reputable annuity service providers. PSR Assurance provides services related to financial planning for federal government employees in getting the annuity benefits they have earned throughout their work lives.