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This Single Overlooked FERS Rule Could Reduce Your Monthly Pension Drastically

Missy E
November 14, 2025

Key Takeaways

If you leave federal service before retiring, the frozen service calculation rule could significantly reduce your FERS pension—often without you realizing it until it’s too late.
Your High-3 average salary is frozen at the time you leave federal service, not when you start collecting your pension, which can lead to thousands of dollars lost annually in retirement.

The High-3 Salary Rule Isn’t What You Think

Under the Federal Employees Retirement System (FERS), your pension is based on your length of service and your High-3 average salary. That “High-3” is the average of your highest-paid 36 consecutive months of federal service.

If you retire normally, the High-3 is calculated right before your retirement. But if you leave government work before reaching retirement eligibility and decide to defer your pension, your High-3 is frozen at the time you leave, not at the time you eventually start receiving benefits.

That’s the overlooked rule that catches many off guard.

What Is a Deferred FERS Retirement?

A deferred retirement means you leave federal service before you’re eligible to draw an immediate annuity but wait until a later date to start collecting your pension.

To be eligible, you must:

Have at least 5 years of creditable service, and
Leave your retirement contributions in the system (don’t withdraw them).

You can begin drawing your pension as early as your Minimum Retirement Age (MRA) if you have at least 10 years of service, but with a 5% per year reduction for each year you’re under age 62.

Alternatively, you can wait until age 60 with 20 years, or age 62 with 5 years, to receive your full unreduced benefit.

However, what doesn’t change is your High-3—it’s locked at the salary you were making when you left.

How Much This Rule Can Really Cost You

Let’s say you leave federal service in 2025 at age 45 after working for 20 years, and you plan to defer retirement until age 60. If your final salary in 2025 is $85,000, that becomes your High-3—even if you would’ve been earning $120,000 or more by 2040 had you stayed.

Here’s the problem:

Your 20 years of service still count,
But your pension is calculated based on that $85,000,
Even if federal pay scales increase substantially over the next 15 years.

The difference could mean a loss of $10,000 or more per year in retirement.

Why So Many Government Employees Miss This Detail

It’s easy to assume that your pension will reflect your salary when you start collecting benefits. But that’s only true if you retire while still employed. The rule for deferred retirement isn’t always explained clearly in retirement briefings or HR consultations.

Compounding the confusion:

There’s no formal statement or alert when your High-3 becomes frozen.
You won’t see the impact until you apply for retirement decades later.
Most retirement calculators assume you continue working until retirement age unless you manually override them.

That makes it hard to spot the issue unless you know to look for it.

What You Can Do If You’re Considering Leaving Mid-Career

If you’re planning to leave the federal government before retirement eligibility, there are still options to protect your future pension:

1. Understand the timing trade-offs

If you’re within 5 years of retirement eligibility, it may be worth staying to secure an immediate annuity. For example:

Staying until age 50 with 20 years of service (for special category employees)
Or until age 60 with 20 years of service (for all others)

The longer you stay, the more likely your High-3 reflects your highest possible earnings.

2. Delay separation if possible

If you can wait even 1-2 more years, your High-3 could improve significantly. That’s especially true if you’re due for:

A step increase,
A promotion,
Or a locality pay adjustment.

Every dollar of High-3 increase adds compound value to your pension.

3. Run multiple pension scenarios

Don’t rely on general calculators alone. Instead:

Use OPM’s estimate tool with frozen salary input,
Work with a retirement specialist familiar with FERS nuances,
Model out your pension with and without delayed departure.

Even a small delay can create a measurable long-term gain.

The Misconception Around Cost-of-Living Adjustments (COLAs)

Another point of confusion: COLAs apply only after you begin drawing your pension. They don’t retroactively grow your High-3.

So if your salary in 2025 was $85,000 when you left and you defer your pension until 2040, you won’t get COLAs on the $85,000. Instead, you’ll draw a pension based on that frozen figure, then receive COLAs on that lower amount going forward.

That makes locking in a higher High-3 before you separate even more critical.

Should You Cash Out Your FERS Contributions Instead?

If you’re leaving and don’t plan to claim a deferred retirement, you may consider withdrawing your retirement contributions. But this has consequences:

You forfeit all future pension rights.
You may owe taxes and penalties on the withdrawal.
You lose the safety net of a guaranteed annuity.

In most cases, deferring your pension—even if reduced—is better than withdrawing unless you plan to re-enter federal service later.

FERS Deferred Retirement Doesn’t Include Some Benefits

Here’s another cost of leaving early: you lose access to some key benefits in deferred retirement that immediate retirees receive.

You won’t get:

The FERS Annuity Supplement (bridge to Social Security for under-62 retirees)
FEHB (Federal Employee Health Benefits) in retirement
Continued FEGLI (life insurance) unless converted to private

These losses compound the impact of the frozen High-3 and should factor into your decision.

You Can Still Qualify for an MRA+10 Early Retirement

If you’ve hit your MRA (between ages 56 and 57 depending on birth year) and have at least 10 years of service, you may qualify for an MRA+10 retirement instead of a deferred one.

Benefits of MRA+10:

You receive immediate payments (not deferred)
FEHB and FEGLI may be retained (if eligible)

Drawback:

Your annuity is reduced by 5% for each year under 62

You can minimize that reduction by postponing the start of benefits, making this a hybrid strategy between deferred and immediate retirement.

Federal Pay Growth Makes Delaying More Expensive

The longer you wait after separating, the more pronounced the loss due to a frozen High-3. Federal pay usually rises with inflation, locality adjustments, and step increases.

Even modest 2-3% annual raises over 10–15 years can drastically widen the gap between your frozen High-3 and what it could’ve been.

That means every year you delay separation could protect thousands in annual pension income later.

Review Your Exit Timing Carefully

Leaving public service mid-career is a personal decision—but understanding the financial consequences is essential. Too many federal employees discover the frozen High-3 rule only after it’s too late to change course.

A few questions to ask yourself:

How much will I lose by freezing my High-3 now?
Can I afford to give up FEHB or the FERS Supplement?
Would a short delay improve my retirement picture dramatically?

These aren’t just technical details—they directly affect your retirement lifestyle.

Rethinking Your Separation Date Could Preserve Thousands Annually

While deferred retirement is a valid option, it comes with hidden costs many don’t see until their first pension check arrives. The frozen High-3 salary rule is one of the most overlooked but financially impactful features of FERS.

Before you finalize your departure, talk to a licensed professional listed on this website. They can help you model realistic outcomes, assess your High-3 exposure, and create a plan that fits your long-term financial goals.