Understanding High-3: Maximizing Federal Employee Retirement Benefits

6.14.24: Audio automatically transcribed by Sonix

6.14.24: this mp3 audio file was automatically transcribed by Sonix with the best speech-to-text algorithms. This transcript may contain errors.

Speaker1:
Welcome back to the federal retirement show. I'm your host, Val Majewski with America Benefits Exchange. I really appreciate you taking the time out of your schedule to join us. View our content before we get started. I highly recommend if this is the first episode that you're watching with us. Well, number one, thank you for tuning in. Thank you for checking it out, but I highly encourage you to go back and view all of our previous content. It is for you, the federal employees, so that you can better understand all the options, all the benefits, all the retirement information, all the choices that you need to make and just be filled with as much knowledge as possible, as much information as possible, so you can make the best decisions and make sure that you are set up properly, both now and as you move closer and closer towards retirement. So today's conversation and where we're going to discuss, uh, today is about a question I've got asked recently when talking to some federal employees at an event that I was speaking at, and they had a question about high three, and the question revolves around high three and then retirement. And I wanted to go back and just revisit the high three in general and just kind of go over it as a further understanding of your high three and what it means for your retirement, for your pension calculation, but also discuss how you can, you know, help maximize your high three.

Speaker1:
What are some of the things you can do to do that, and then also utilize that to your benefit for retirement purposes, retirement income purposes. So let's let's dive in today and we're going to talk about again your your high three. Now what is your high three standard definition for retirement purposes. It's the number they're going to use I'm going to use in order to calculate your pension. It's the starting point. It's it's the number that they utilize to do your retirement calculation. Now what exactly is it. The the high three is the average of the highest three consecutive years of total base pay, generally base pay plus locality. And I'm going to go through some of the things that may or may not be included in your high three, but it's the average of the highest three consecutive years of total base pay now consecutive. Does it does it mean it has to be calendar years? No, I get that misconception a lot where people are like, well, I didn't have this certain salary for a full 12 month period, full calendar year period. So I don't think it counts towards my high three. That's incorrect. It's going to be the highest 36 month period, highest consecutive 36 month period. So it could be a January to a January. It could be a march to a march or a June to a June.

Speaker1:
It doesn't have to be just the calendar year. And it's all a weighted average. So if you're at a certain salary, you got a step increase a pay raise for only a couple of months, then that's going to be a weighted average as one of those 36 months. Now generally says high three three years, but understand it's a consecutive 36 month period and it's a weighted average of all of those salaries. And maybe some pay increases, step increases, promotions, other things that you have in there during that time. And that's the number they're going to use to start by calculating your pension with so what all is included in there. Well just base pay plus locality. Some people ask that question is locality included in my high three. Absolutely, absolutely. Uh, what's also included? Well, if your shift worker shift work pay is included in there, uh, generally speaking, I'm going to go into what's not included. You know, bonuses are not in their holiday pay, uh, military pay, overtime, not including your high three. But if you are a law enforcement officer and you have a low that is included if you have leap pay as a federal law enforcement officer, that's included in your high three, um, if you're a worker that has an increase in pay due to environmental differential, which means that you're exposed to different degrees of, of hazard, physical hardship, um, and working conditions of an unusual nature is what they call it.

Speaker1:
Then that may be included in your high three. But generally speaking, let's say base pay plus locality. Great starting point. If you're some of those special groups or some of those special things, you can have a few extra items included into that high three. But generally speaking, I said overtime, um, holiday pay, military bonuses, things of that nature are not included in your high three. Now, how do we maximize the high three, and how can we help maximize it a little bit and save money in retirement? This is where the question kind of came in when I was talking to this federal employee. So it was not just about what's in my high three, even though that was part of it. But will will my pension calculation change? Depending on where I'm living in retirement, and this is where I want to go into a couple of things that I've seen other federal employees do when it comes to maximizing their high three for retirement purposes, because remember, one, calculate your pension that's that's set up. And this is one of the misconceptions also that I've heard. And hopefully this is not you, but I've heard people say, well, what if I live in an area with low locality pay in retirement? Well, my pension be reduced. And the easy answer is no, there's no locality pay in retirement.

Speaker1:
Locality does go towards your high three, but there's no locality or any kind of reverse of that in retirement. So what I've seen a lot of federal employees do in order to maximize is perhaps they've tried to get a promotion or get a transfer or work in a place where they can increase their high three because it's such a high locality increase. And they can do that for a certain period of time. If you look at the top locality areas in the country, and I'm not saying this is what you have to do, but I've seen other federal employees do this or attempt to do this. You've got San Francisco, Los Angeles, New York, D.C., actually, Houston, some of the highest locality increases in pay, uh, across the country. And there are others as well. Then you can imagine there are others that do not have much, if any, locality adjustment because of where they're located. But those I mentioned San Francisco, LA, New York, DC, Houston, they've got some of the largest, if not the largest locality adjustments locality increases out there. And I've seen where federal employees have worked in those areas for a certain period of time, let's say three years, and they've gotten their high three locked in to a much higher rate because of that locality adjustment. And that's set. So even if they take the same job and moved to an area that is a lower locality pay, they have locked in their high three at this higher rate.

Speaker1:
Now it doesn't work out for everybody. And that's not like if you get you get a hired in New York early in your career that that's going to be set of your high three because you might get increases along the way and pay raises and promotions and all that stuff that goes far and beyond, no matter where you work or where you live. But understand there are ways that you can look at maximizing your retirement. I'm not telling you you have to move and I'm not telling you have to go somewhere. But I've just seen different strategies that people have taken in order to increase their retirement pay. Because why? It does not matter where you live in retirement so your high three can be locked in. And you can get this higher benefit amount in retirement. And if you live in technically what would be considered a low locality, Bay area or a lower cost of living area, right? As far as, uh, buying groceries, cost of purchasing a home, property taxes, uh, fuel, I mean, all of these things. Right. Let's say your cost of living is a lot less. Well, your pension and retirement is locked in based upon your high three. In that calculation, it does not get reduced or decreased depending on where you live in retirement.

Speaker1:
So you can try to manage of as much as you can to increase your high three. That's it. Try to get as many pay raises, promotions, step increases, um, to increase that high three or the other way is based on locality, right? Finding an area across the country that pays higher for, let's say, the same position. You're able to get that for a certain period of time in order to lock in that high three at a higher rate, it doesn't mean you have to stay there. It's not about where you retire. It's the high three is the highest, the average of the highest consecutive three years of total base pay. Again generally base pay plus locality. So it doesn't matter where they are. It could be your first three middle three. Generally speaking it's it's your last three because that's normally how people do it. But it doesn't have to be. I've had people that I've worked with and talked before and they're making a certain salary today and they say, oh no, my high three is higher than that. I locked it in years ago, you know. Excuse me, I locked it in years ago. By the time in the, the work that I did in this area of the country, and it was significantly higher than their current salary. And the good news is, when they come back around for their pension calculation, they're going to use that higher three average, right? That high three average from that higher period of time.

Speaker1:
So what are we talking about again. Well, generally what is in your high three. Just so you know look the leave annual leave uh bonuses overtime I said the holiday pay those things are not going to be included in your high three. What generally is it's going to be base pay plus locality. Uh and if you're in those special groups there, as I mentioned earlier, you could have a few other things added. But let's just say generally speaking, base pay plus locality is what's going to determine your high three. If you're looking to increase it. Let's say you're capped out, maxed out, unable to earn any more in your current position. Really the only way to get some more income right could be a locality adjustment if you worked in a different area. Now, I said, I've seen other folks try to strategize and do it this way. It doesn't mean you have to. We're just talking about concept, right? This is a question that came up and said, how can I increase it? What have you seen was the question that what have you seen on top how people increase their high three? So not only was it about what's in the high three, but how can I most effectively maximize my high three. And then the other question, as we mentioned earlier and answered earlier, is will this be affected by where I live in retirement? Now? Again, the answer is no, right? You can lock in your high three by working in a high locality area like Los Angeles, but it doesn't mean you have to retire there.

Speaker1:
You can retire to an area of the country or an area of the world that is, um, a different cost of living. Let's put it. It lets you keep more of your money, less taxes. There are there are states out there that talk about this taxation of, of your retirement benefits that either do not charge state income tax at all or do not charge state income tax on pensions and Social Security benefits. So you can look into those areas and say, hey, I, I've got my high three to a point that's pretty solid and I'm going to retire, move to an area that's going to let me keep more of my money. That's something that you can do to help maximize your retirement. So on the front end, how do you earn more money? When it comes to your your pension. Well, obviously the first thing as we're talking today increase your high three as much as you can. That can be done through regular pay raises, promotions, things like that, but also through a locality adjustment. Do you can work longer, more service time you have and the higher your high three, the more your pension calculation is going to be.

Speaker1:
Right? But where you live is going to determine how much comes out of your pension and your retirement income. So you can increase it by doing all those things we mentioned and decrease the amount that comes out by living in a place that is more beneficial and more advantageous for you when it comes to your retirement income. So those are a lot of things to consider when it comes to maximizing your retirement. I know our discussion today is about high three, and making sure you get a full understanding of what that is, but this is important to know how to utilize it, right? What is it going to be used for number one? And then how can you take advantage of and maximize your pension down the road? So if you do have have questions about this kind of stuff, right. If you do have questions about, hey, what is my high three look like, what is my pension calculation look like? What is my future look like? We can run those projections for you. And we do that with federal employees on a daily basis. We not only can look at the salaries that you've had over time, we can do a rough estimate of what your high three could be in the future, based on a particular pay raise scale that you've been on over time. And we can project what your future retirement is going to look like, so you can see if you're on the right track.

Speaker1:
And we do this again on a daily basis, making sure that you understand all you need to know about your benefits and retirement information. How do you reach out to us? How do you request information? How do you get your questions answered? Uh, go to our website, Federal Retirement Show.com fill out the form that's on that site. And one of our experts, if it's not me in particular, if one of our experts across the country will be reaching out to set up time to go over your benefits and retirement information and get your questions answered, get you the information that you need. Well, again, I really appreciate you taking the time out of your busy schedule to view this content. As I mentioned earlier, go back and view our previous episodes. Uh, that's what they're there for. There for you, the federal employee, to gain as much knowledge and understanding as you can about your benefits and retirement situation. If you have items and questions and things that you want to see on future episodes, reach out to us as well, and we'll be happy to throw that in the mix and make sure that we we make an episode based on the content that you're looking to see. Thank you again and look forward to seeing you on a future session.

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