How to Estimate Your FERS Annuity to Include Pay Raises and Grade/Step Increases
“How far do you think you could advance over the course of your federal career?” I asked a younger employee recently.
“I guess I’m not sure. Why do you ask?” they replied.
This exchange was meant to highlight the reasons to be thinking proactively—one of those reasons is creating an accurate picture of FERS basic annuity estimate. The FERS pension can be a federal employee’s most valuable benefit over time, and what it may be worth in the future is not always straight-forward.
Projecting a Future FERS Annuity
The FERS Basic Annuity projections located in a benefits summary can serve as a good starting point, but it’s important to understand this summary generally incorporates your current High-3 salary as the basis for future benefits.
There are two big things to consider when projecting a future pension amount:
1) Grade and step increases
How will your career progress over time? It can be hard to know exactly where you’ll finish up, but I’ve found that most federal employees have a pretty good idea on how far they may advance.
Consider potential ending grade and step, as well as locality pay. You can find the various GS pay tables at OPM.GOV.
2) Annual pay raises / cost-of-living increases
Looking at things in today’s dollars can be useful, but it’s also important to plan for future increases. Adjusting the current GS table by reasonable cost of living increases over time will help us to understand what future dollars may look like.
While pay raises have been all over the place in recent years, looking at a long-term history of the Consumer Price Index (CPI) and past pay raises may provide good basis for an estimate.
Example:
Let’s look at a simple example to drive these concepts home.
A current federal employee is a 48-year-old GS-14 with 16 years of service. They are considering retiring at age 60 with 28 years of service, and potentially 2 years later at age 62 when the 1.1% multiplier would kick in.
Advancing to GS-15 level is a big goal, and they feel GS-15 step 3 is where they could end their career.
The Washington DC locality pay table as of January 2024 looks like this:
Their goal--GS-15 step 3--currently pays a salary of $174,894 in DC as of January 2024.
Next, we’ll need to adjust that number for pay raises:
At Age 60 - $174,893 @ 3% annual pay raise x 12 years = $249,357
At Age 62 - $174,893 @ 3% annual pay raise x 14 years = $264,543
In this scenario the employee’s High-3 would technically be an average of their last 3 years of salary (probably something a little bit different than our calculation), but we are going to keep the math simple. You can always back out the numbers to be as precises as desired.
Now we can look at how much the annuity may be worth.
FERS Annuity Calculations:
Age 60 -- 1% x 28 years x $249,357 = $69,819
Age 62 – 1.1% x 30 years x $264,543 = $87,299
This gives us a pension estimate based in future dollars by including potential pay raises and promotions.
If you are working on a retirement income worksheet make sure to include any deductions that may apply to your FERS annuity – survivor benefits, taxes, health and other insurance coverages.
What do you think, have you thought about your pension in these terms?
-Justin
*The content is developed from sources believed to be providing accurate information.This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material
