The High-3 Salary Rule Sounds Straightforward—Until You See What It Leaves Out at Retirement

Key Takeaways

• Your High-3 salary determines a major portion of your pension, but it may not reflect your actual highest earning potential, especially if bonuses, overtime, or locality pay are excluded.

• Understanding what counts and what doesn’t in your High-3 average can help you plan ahead, fill income gaps, and avoid surprises at retirement.

Understanding the High-3 Salary Rule

At the heart of the retirement formula for most public sector employees is the “High-3” salary rule. This is the average of your highest three consecutive years

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On the surface, the rule seems clear: take your three highest-paid years and average them. But the truth is more complicated. Not every dollar you earn is included in that calculation. And what gets left out can have long-lasting effects on your retirement income.

What Is Included in the High-3 Calculation?

Your High-3 salary includes:

• Basic pay for the position you held

• Step increases within your pay grade

• Promotions that resulted in permanent increases in base salary

• Annual adjustments to federal pay scales

It’s the highest three consecutive years, not calendar years. That means it can start on any date, not just January 1. For many employees, the High-3 period occurs just before retirement, but this isn’t always the case—especially for those who took on higher roles earlier in their career.

What’s Left Out of the High-3 Average?

Here’s where the gaps begin. The following types of compensation are not included in the High-3 average:

• Overtime pay

• Bonuses or performance awards

• Differentials (such as night or hazard pay)

• Travel reimbursements

• Uniform or equipment allowances

• Locality pay (depending on legislation and employment classification)

While you may have counted on these income sources to maintain your lifestyle while working, they vanish from the pension equation when it matters most. For example, an employee who earned substantial overtime in their final years won’t see any of it reflected in their annuity.

Why Locality Pay Is Now Under Scrutiny

Locality pay is perhaps the most misunderstood component. In 2025, there’s a legislative proposal under review that could exclude locality pay from High-3 salary calculations. If passed, this change could significantly reduce annuity amounts, especially for those in high-cost regions like San Francisco, New York, or Washington, D.C.

Currently, most federal employees under FERS include locality pay in their High-3 average, but not all categories of workers are treated the same. For example, special pay rates for certain occupations—such as IT specialists or law enforcement—may or may not be counted depending on classification and pay authority. If locality pay is removed from the formula altogether, thousands could see their expected pensions decrease by thousands of dollars annually.

How the High-3 Formula Works in Practice

Let’s break down how the High-3 average is used in calculating your pension:

For FERS, the basic annuity is:

• 1% of your High-3 salary multiplied by years of creditable service, or

• 1.1% if you retire at age 62 or later with at least 20 years of service

For CSRS, the calculation is more generous:

• 1.5% of the High-3 for the first 5 years

• 1.75% for the next 5 years

• 2% for each year after that

So even a small difference in the High-3 salary can lead to substantial variations in long-term income. Let’s say your High-3 with locality pay included is $100,000. Without it, you drop to $88,000. Over a 30-year retirement, that $12,000 gap can reduce your lifetime income by tens of thousands of dollars.

Timing Matters More Than You Think

If you took a temporary promotion or assignment that bumped your base salary, it only helps your High-3 if it lasted three full consecutive years. A 12- or 18-month detail doesn’t move the needle unless it’s part of a longer pay increase. In contrast, someone who holds a higher-paying role for three straight years—even if it’s earlier in their career—could retire with a larger annuity than someone who earned more overall but had irregular income patterns.

This is why retirement planning should start well before your final years of work. You may need to strategically extend a position, delay a transfer, or time your departure to lock in the most favorable High-3 window.

Impact on Your Retirement Income Plan

Assuming your High-3 will fully reflect your peak earnings could result in overestimating your retirement income. This can affect:

• Your ability to cover healthcare premiums or long-term care

• Whether you can afford to delay Social Security for a higher benefit

• How much you need to withdraw from your Thrift Savings Plan (TSP)

If you’re counting on a $40,000 annuity but end up with $33,000, you may find yourself drawing down savings more quickly—or needing to work longer.

Strategies to Protect Your Retirement Outlook

There are ways to prepare for what the High-3 formula leaves out:

• Request an estimate of your annuity based on current pay and service.

• Review your SF-50s to understand which salary increases were permanent.

• Talk to HR early to identify your exact High-3 period.

• Max out your TSP and consider catch-up contributions if you’re age 50 or older.

• Explore FEHB and Medicare integration options to reduce out-of-pocket healthcare expenses.

These steps help you plan for the gap between your working income and your pension.

What About the FERS Annuity Supplement?

If you retire before age 62 and meet eligibility criteria, FERS offers a temporary annuity supplement meant to approximate the Social Security benefit you would have earned during federal service.

However, this supplement:

• Ends at age 62 regardless of when you claim Social Security

• Does not factor in your full Social Security record—only your federal years

• Is subject to an earnings test if you work after retirement

And crucially, it’s still based on your High-3 annuity calculation. If your base annuity is lower due to excluded earnings, your supplement will be smaller as well.

When Is the High-5 Rule a Better Deal?

Some states or public agencies use a High-5 salary calculation instead of High-3. While this spreads the average over five years instead of three, it can sometimes lead to a more stable, less volatile pension figure, especially for those with uneven income.

However, High-3 generally produces a higher result—if your top earning years are consecutive. But that’s a big “if.” For public sector employees who move in and out of different roles, or who take long-term leave, the High-5 approach might better reflect their earnings stability.

If you’re employed under a state or local system rather than FERS or CSRS, it’s essential to understand how your specific pension rules apply.

What Recent Policy Changes Mean for You

In 2025, several changes are shaping how High-3 calculations may affect future retirees:

• COLAs are expected to remain modest, which makes locking in the highest High-3 window more critical.

• Legislative proposals may alter what counts—especially for locality and special pay.

• Budget pressure is pushing retirement reform, potentially affecting younger employees more.

These shifts make it even more important to analyze your personal pay history and projected retirement timeline.

You Can’t Rely on the High-3 Alone

Your pension is only one piece of the retirement puzzle. Even with a strong High-3, most public sector employees still need to supplement their income.

• TSP withdrawals, Social Security, and personal savings need to be aligned.

• Life expectancy is increasing, stretching the number of years your retirement income must cover.

• Healthcare and long-term care costs continue to rise in 2025.

If your High-3 calculation surprises you on the downside, the rest of your retirement plan needs to be strong enough to carry the difference.

Planning Ahead With Expert Help Matters

Understanding what the High-3 includes—and excludes—can be the difference between a comfortable retirement and a shortfall. It’s a technical rule, but its consequences are deeply personal. You’ve worked hard to build a career in the public sector. That effort deserves a retirement strategy that protects your income, accounts for gaps, and adjusts to policy changes.

If you’re unsure where your High-3 stands—or how to make up for what it leaves out—get in touch with a licensed agent listed on this website. They can help you review your income projections and develop a tailored strategy that works with your entire benefits package.