High-3--What is it?

We aren’t talking about Snoop, Willie and Uncle Joe. You don’t know who the last one is, but it’s the only guy I could think of that’s as high as the other two. Uncle Joe was a guy that lived down the street from me as a kid. He was famous for spending all summer afternoon in the poison-ivy infested woods around our houses wearing nothing but a speedo, and smoking dope.

(This might be a record for how fast one of my articles has gone off the rails).

I didn’t think there was much confusion with the concept of the Average High-3 Salary. Boy, was I wrong. Let’s clear it up. Or try to.

First of all, we need to understand that the High-3 is one of two numbers OPM uses to calculate your annuity. The other is your Service Computation Percentage (basically the number of years you worked, converted into a percentage). OPM just multiplies your Service Comp Percentage by your High-3 and that provides you with your annual pension. But what does the High-3 include exactly?

The General Rule

You High-3 includes your Base Pay + Locality Pay. For you law enforcement officers that receive LEAP/AVP, it also includes that. (More on this later).

It does NOT include the following: Per Diem, Bonuses, Cash Awards, Post Differential Pay for you people overseas, Danger Pay, and hazardous duty and OT (in most cases).

For some reason, there are people in retirement seminars advising law enforcement that their 25% LEAP is not included in their High-3. This is false. It is included. Trust me on this one, as someone who is receiving their annuity based on their High-3 that includes LEAP. (Also, the rules are clear).

The Exceptions to the General Rule

You ought to know by now as soon as there is a rule about something under FERS, there are several exceptions. This is no different. No way I can list all the exceptions. I don’t even know all the exceptions. But I’ll list some of them. I firmly believe if you are in a job that has these exceptions, you already know about them from the institutional knowledge of all those working alongside of you for years. If you have no idea if the following applies to you, it almost certainly does NOT then.

Overtime. Some segments of FERS are allowed to count some OT toward their High-3. Some structural firefighters are in this boat. Border Protection may receive some types OT that counts for their High-3.

Retention. There are also some types of retention pay that is counted towards the High-3, but not other types of retention pay.

Hazardous/Dangerous. Most pay related to dangerous environments—like working in a particular country—doesn’t count, but sometimes working in a dangerous environment—like around nuclear weapons—does.

So, again, if these very rare situations apply to you, I’m assuming you already know that, or can ask around at work.

How Is It Calculated?

This is where the majority of the confusion comes into play, I think. Let me dispel a few myths all at once:

Your High-3 has absolutely NOTHING to do with the calendar year, your W-2, your tax return, your Social Security earnings record, or how much money goes into your bank account.

It is a rolling, consecutive, 36 month period that includes the things we mentioned above. For example, assuming your pay continues to increase, every month you stay on, you add one month at that higher rate, and one month 36 months ago falls off. OPM couldn’t care less if you retire in February, July, August or December. It has nothing to do with the calendar year. They’ll back your retirement date up 36 months from whenever you retire.

For example, retire on 10/31/24, and your High-3 will be from 11/1/21 to 10/31/24. Same is true if you retire in March or August or whenever.

Careful, though. All of that is true if your last 3 years are your highest paying years. But what if they aren’t? For most people they are. But not for everyone. Here are a couple of examples:

Example One:

You spent many years as a GS-13 in New York City. But your last 2 years, you take a lateral transfer back home to French Lick, Indiana. Then you retire. Guess what? Your last 2 years’ salary were WAY lower than the NYC salary (because of a much lower Locality Pay), so OPM won’t use those years. They’ll use the NYC years. Because it’s the “High-3”. It’s not the “Last 3”.

(By the way, I did a retirement seminar in French Lick last year for some Forest Service folks. Great time!)

Example Two:

You’re an FBI agent working in San Francisco. You take a LEGAT job in Madrid, Spain for your last 3 years. When you are overseas, you do not get Locality Pay. Locality Pay is a stateside construct. You may get some sort of foreign post differential or other allowances overseas, so your salary may be higher than it was in San Francisco, but those foreign pay items don’t count towards your High-3. So the reality is, your High-3 will in all likelihood be from your San Francisco time. Why? Because San Francisco included Locality Pay, which counted for your High-3, thus making your salary higher for purposes of the High-3.

Most people that retire overseas in my experience will be using their High-3 from their stateside time. It’s almost always higher.

You can probably think of more. But you get the concept.

36 Consecutive Months

One way I attempt to describe this in my retirement seminars is by asking attendees to imagine a timeline of their entire career. Day 1 at one end, Day 10,000 at the other end. And on that timeline broken into months is their salary for each of those months.

Now, imagine a 36 month window, that OPM slides up and down that timeline to capture whatever salary they can capture within that 36 month window that produces the highest dollar figure. That’s the High-3.

What this means is that if you were an acting GS 14 five years ago, but went back down to a GS-13 for your last four years before retirement, then that GS 14 year probably won’t be factored in if your final 3 years produced an average High-3 greater than the GS 14 year and the years surrounding it. In other words, you can’t just pick the 3 highest years of salary if they are separated by multiple years. This time has to be consecutive.

Don’t overthink this too much—for the vast majority of you, the High-3 is going to be your last 3 years. For most of us, our salary continues to increase each year until we pull the pin and ride off into freedom like Andy Dufresne. But understand for those of you whose salary is now lower at retirement than it was at one time, your High-3 is going to be from those other, earlier years.

But, Chris, How EXACTLY Do You Calculate It?

I’m not going to bother writing all of that out. I doubt any of you would do it anyway. But if you want to practice, I’ll provide the link where OPM teaches you how to HERE.

From a practical standpoint you won’t ever have to do it. Your agency will provide you with an estimate, normally through GRB or FedHR Navigator software. That will provide you some insight. The FedHR Navigator one in my opinion is far superior to GRB in this area.

Also, OPM will calculate your High-3. They are the final arbiters of all of your retirement calculations. But it is helpful for you to have some idea of what your High-3 is so that you know what to expect from OPM. They can, and do, make mistakes and you want to know if you’ve been shorted any money.

OPM will be very precise with it. They will actually break it down into how many days you were at each salary and create what is called a Time Factor, which is in essence, a percentage of those 36 months you were at each pay level. (See, I told you you probably won’t do this yourself). You can see an example on page 66 of the OPM link above. If any of you have received a retirement estimate from me, your report includes an estimate of the High-3 calculated the OPM way.

Again, there’s a lot of confusion out there. Hopefully this clears some things up. It’s not something to stress out over. I see people all the time obsessing on how to increase their High-3 by staying longer. If you want to, that’s fine. For every “pro” there is to staying, there is also generally a “con,” so take both of those factors into account when you’re deciding. This article isn’t meant to be the answer to the never ending, “Chris, should I stay another 2/4/6/24 months to increase my High-3?” I can’t answer that. Probably not. Life awaits, retire already :) But it’s up to you.