Dana is 61, has 30 years in, and just got her first retirement estimate from her agency's HR office. She is looking at a number that is $3,000 a year lower than the figure her coworker, who is a year older, quoted over lunch. Same grade, same years, same agency. "Did they make a mistake?" she asks.

They didn't. Her estimate is almost certainly correct, and the gap comes down to one small decimal in the FERS formula. Once you see how the pieces fit, you can check any estimate yourself.

The basic formula

The FERS basic annuity has three ingredients:

Annuity = multiplier × high-3 average salary × years of service

The multiplier is 1 percent for most employees. If you retire at age 62 or older with at least 20 years of service, it rises to 1.1 percent.

That is the whole structure. Everything else is about what counts as salary, what counts as service, and what gets subtracted afterward.

What "high-3" actually means

Your high-3 is the highest average basic pay you earned over any three consecutive years of service. It does not have to be your final three years, though for most people it is.

Basic pay includes your base salary and locality pay. It leaves out overtime, bonuses, awards, and most allowances. If you've been leaning on overtime to boost your take-home, know that it won't carry over into your pension.

Say your salary was $92,000, then $96,000, then $100,000 over your last three years. Your high-3 is $96,000.

Counting your years of service

Service credit is measured in years, months, and days, so a partial year counts. A few things can add to it:

  • Unused sick leave. For retirements on or after January 1, 2014, your unused sick leave is credited in full. Roughly 2,087 hours equals one year of added service. It counts toward the annuity calculation, but not toward the eligibility requirements.
  • Military service. If you made a deposit for active-duty time, it counts. If you haven't made one, ask your HR office what it would cost and what it would add before you retire.
  • Civilian service deposits. Certain earlier civilian service may be creditable if you pay the required deposit.

Two worked examples

Example 1: The 1 percent case

A retiree at age 60 has 28 years and 6 months of service, plus enough unused sick leave to add one year. Their high-3 is $95,000.

  • Service for computation: 29.5 years
  • $95,000 × 0.01 × 29.5 = $28,025 per year, or about $2,335 per month

Example 2: Dana's decision

Dana's high-3 is $100,000 and she has 30 years. She is at her minimum retirement age (MRA) with 30 years, so she can retire now with no age-based reduction.

  • At 61: $100,000 × 0.01 × 30 = $30,000 per year
  • At 62: $100,000 × 0.011 × 30 = $33,000 per year

Waiting one more year raises her annuity by $3,000 before counting anything else. She would also add another year of service, and her high-3 might tick upward with a raise. A single year can change the lifetime math noticeably. It can also be the wrong move if health, family, or the job itself says otherwise. The point is to see the trade clearly before you decide.

Who gets a different formula

Some jobs have a more generous multiplier. Law enforcement officers, firefighters, and air traffic controllers get 1.7 percent for the first 20 years and 1 percent for each year after that. These categories also come with different age and service rules, including mandatory retirement ages in some roles, so don't apply the standard rules to them.

When you retire matters as much as how long you worked

Eligibility for an immediate annuity depends on your age and service:

  • MRA with 30 years: unreduced annuity
  • Age 60 with 20 years: unreduced annuity
  • Age 62 with 5 years: unreduced annuity
  • MRA with 10 years of service: annuity reduced by 5 percent for each year you are under 62, unless you have 30 years

Your MRA is between 55 and 57, depending on your birth year. That reduction can be steep. Someone who retires at their MRA of 56 with 10 years of service, for example, takes a 30 percent cut because they are six years under 62. Check the current rules at opm.gov, since your birth year determines your exact MRA.

What happens after the base number

The basic annuity is a starting point. A few adjustments sit on top of it.

Survivor benefit. If you want your spouse to continue receiving income after you die, you elect a survivor annuity. The cost is a 5 percent reduction for a partial survivor benefit (25 percent of your annuity) or 10 percent for a full one (50 percent). On a $30,000 annuity, the full option costs $3,000 a year. That is real money, so talk it through with your spouse. A spouse's written consent is generally required if you want to waive it.

Cost-of-living adjustments. FERS COLAs generally begin at age 62 for most retirees (law enforcement, firefighters, and controllers are among those who get them sooner). They are also "diminished": when inflation is above 3 percent, the COLA is inflation minus 1 point. Between 2 and 3 percent, the COLA is a flat 2 percent. Below 2 percent, it matches inflation. The actual percentages change every year, so check opm.gov for the latest.

FERS supplement. If you retire at MRA with 30 years, or at 60 with 20 years, you may get a Special Retirement Supplement. It approximates the Social Security benefit you earned during your federal career, and it is paid until age 62. It's subject to an earnings test if you keep working. It is not part of the basic annuity, but it matters when you compare retirement dates.

Taxes. Part of your annuity is typically taxable. Because you paid FERS contributions from after-tax pay, a portion of each payment is treated as a return of those contributions until they are recovered. The rest is taxed as ordinary income. Details and current figures are at irs.gov.

How this fits with your TSP

The annuity is only one leg of the stool. Social Security and your Thrift Savings Plan are the other two. When you build a retirement income plan, the annuity gives you a predictable floor, and the TSP gives you flexibility. How much you need to draw from the TSP, and when, depends on how large that floor is.

That is why running the formula yourself pays off. Pull your last few Standard Form 50s or earnings statements, work out your high-3, add up your service, and compare your result with the agency estimate. If the two don't match, ask why. Errors are uncommon but not unheard of, especially with deposits and leave balances.

For Dana, the answer was simple. Her coworker had crossed 62, and she hadn't. What she does with that information is her decision, but she now makes it knowing exactly what the extra year buys.