The high-3 average salary is the single largest variable in your FERS annuity calculation. The 1.0% or 1.1% multiplier gets applied to it. Your years of service get multiplied by it. The survivor election reduction gets calculated against it. Every other FERS number is downstream of this one. And most federal employees have only a vague sense of how it is actually calculated.

Here is the formula, the rules, and the levers you may or may not have.

The basic formula.

The high-3 is the highest three consecutive years of basic pay in your federal career, averaged. The window does not have to be your last three years. It is the three consecutive years with the highest gross basic pay.

For most career federal employees, the highest three years of basic pay are the last three. Step increases, within-grade raises, and promotions all push the average up. But the window is not the last three years by definition. If you took a downgrade or a period of leave without pay earlier in your career that lowered your pay, your high-3 window might end somewhere in the middle. Conversely, if you had an unusually high-earning year late in your career (perhaps from a brief promotion or a temporary detail), the window might land on that year.

OPM computes the high-3 by looking at your earnings record and identifying the 36 consecutive months with the highest basic pay. The total of those 36 months is divided by 36 to produce the monthly average, which is then multiplied by 12 to produce the annual high-3.

What counts as basic pay.

This is where most of the disputes arise. Basic pay for high-3 purposes includes:

  • Regular salary at your grade and step.
  • Locality pay (the geographic adjustment that most General Schedule employees receive).
  • Special rate adjustments for specific occupations or locations that deviate from the General Schedule.
  • Within-grade and step increases, once they become effective.
  • Premium pay for non-regularly scheduled work (overtime is generally not included, but some premium pay categories are).
  • Retention incentives and certain other pay categories in specific circumstances.

The full list of included and excluded pay categories is in 5 U.S.C. § 8331(3) and OPM’s implementing regulations. It is a longer list than you might expect, and it has produced decades of administrative case law. The short version: regular, recurring basic pay counts. Lump sums, allowances, and one-time payments generally do not.

What does not count.

Several categories of federal compensation are excluded from the high-3 calculation. The most common exclusions:

  • Overtime pay (FLSA-exempt and non-exempt overtime).
  • Bonuses and awards, including performance awards and incentive payments.
  • Travel and relocation allowances.
  • Cost-of-living allowances for foreign stations.
  • Most lump-sum annual leave payments.
  • Most premium pay categories, including availability pay and standby pay.

The exclusions mean that two employees at the same grade and step with very different total compensation can have the same high-3. An employee who works significant overtime may earn $150,000 in total but have a high-3 based on $120,000 of basic pay. The overtime does not contribute to the annuity.

Why the high-3 matters so much.

Every percentage point of high-3 is a percentage point of pension for life. A federal employee with 30 years of service and a high-3 of $120,000 receives $36,000 per year under the 1.0% multiplier. A high-3 of $130,000 produces $39,000. The $10,000 difference in high-3 is $3,000 per year for life, with annual COLAs. Over a 25-year retirement, that’s $75,000 in nominal annuity payments.

This is why the last few years of career earnings matter so much. Step increases, promotions, and locality adjustments in the final three years are the variables that move the high-3 the most. For employees within a few years of retirement, the promotion you take or decline in the last 36 months is worth thousands of dollars per year of pension for the rest of your life.

The levers you may have.

The high-3 is largely a function of the work you’ve already done. There are, however, a few decisions that move it:

  • Promotion timing. A promotion in the final 36 months can raise the high-3. A promotion earlier than 36 months before retirement may not, because the high-3 window will still be the last three years.
  • Geographic relocation. A move from a low-locality area to a high-locality area in the final 36 months can raise the high-3.
  • Refusing a downgrade. If you’re offered a downgrade within 36 months of retirement, the high-3 captures the higher pay. If you take it, the high-3 captures the lower pay.

The levers are limited, and most employees should not restructure their career around them. But they are worth knowing about in the final 36 months, when career decisions and retirement decisions start to overlap.