Retirement is a major financial milestone, especially for those who have served in the federal workforce. Through the Federal Employees Retirement System (FERS), individuals are offered a structured pension to help ensure consistent income after leaving government service.

In addition to your pension, the Thrift Savings Plan (TSP) provides a powerful savings vehicle designed to help you build wealth with matching contributions and multiple investment options. These two benefits together form the core of your federal retirement package.

Among the decisions you’ll make when approaching retirement is whether your annuity should be calculated using your highest three or five years of earnings. This choice may seem technical, but it has long-term consequences for your monthly income.

While the difference between these two methods may seem minor, it carries substantial weight.

• The High-3 method takes the average of your three highest consecutive years of basic pay.
• The High-5 method averages your five highest-paid consecutive years.

Because the High-5 calculation stretches across a longer period, it may include earlier years with lower earnings—ultimately reducing your average. This can result in a lower annuity compared to the High-3 method. When doing retirement planning for federal employees, this difference can affect income stability for decades.

Suppose your current income is $60,000 and you receive a 3% salary increase each year for five years. That would result in the following income progression:

• Year 1: $60,000
• Year 2: $61,800
• Year 3: $63,654
• Year 4: $65,564
• Year 5: $67,530

The High-3 method calculates your annuity based on the average of your last three years of earnings, which amounts to $65,583. In contrast, the High-5 method averages all five years, resulting in $63,710.

If you’re retiring with 30 years of service before age 62, the difference might look like this:

• High-3 annuity: $19,675
• High-5 annuity: $19,113
• Difference: $562 annually

While that number may appear modest at first glance, it becomes more impactful over time—especially with the cost-of-living adjustments applied to a lower starting base.

Based on input from financial advisors in Puerto Rico, the FERS annuity is structured as a defined-benefit plan that continues to evolve with federal regulations. Although changes have been made to contribution requirements in recent years, the foundational structure of the system remains intact.

If you’re thinking about retiring sooner rather than later, it’s worth noting that your annuity will be calculated based on your current average salary. If you anticipate higher earnings in the years ahead, postponing your retirement could result in larger monthly payments thanks to a longer service record and higher salary average.

The TSP complements your pension by giving you a personal investment account that grows throughout your career. This plan includes several fund options tailored to different risk tolerances and retirement timelines:

• 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)

When combined with your FERS pension and Social Security, the TSP completes a well-rounded retirement plan.

Insights from the best annuity consultants in Puerto Rico emphasize the importance of staying informed about proposed changes to retirement policies. Discussions around increased employee contributions, reduced government matching, or higher healthcare costs could directly affect your post-retirement expenses.

Making the right choice between the High-3 and High-5 calculation methods can have a lasting effect on your financial well-being. While High-3 typically provides a higher benefit, the right answer depends on your career history, future salary expectations, and retirement timing.

At PSR Assurance, we provide expert guidance in financial planning for federal government employees, helping you understand your options and secure the retirement you’ve earned.