What an Annuity Is
An annuity is a series of regular payments made for life. A federal annuity is paid by the government retirement system to a retiree, and in some cases to a survivor, according to the rules of the system that applies.
The High-3 Average Salary
The high-3 average salary is the average of your highest three consecutive years of basic pay. It is a central input in both FERS and CSRS annuity calculations. Because it uses your highest-paid years, the timing of salary increases, promotions, and periods of reduced pay can influence the figure. A separate article explains this in detail: Understanding the High-3 Average Salary.
Creditable Service
Creditable service is the amount of time that counts toward your annuity. It typically includes your civilian service under the retirement system and may include certain military service, deposits made for prior service, and other qualifying periods. Service is usually measured in years and months. Your official service history determines the total.
The Annuity Formula in General Terms
In broad terms, a defined-benefit annuity is calculated as:
The percentage factor differs between FERS and CSRS and may depend on age and years of service.
The result is the annual amount before any survivor reduction, cost-of-living adjustment, or tax withholding. Many people find it helpful to test the formula with a range of salary and service assumptions, and then compare results with the official estimate.
Retirement Estimates
Official retirement estimates are the most reliable starting point for planning. Estimates are based on your actual records, and they can change if your salary, service, or elections change. Educational calculators and articles can help you understand the logic, but they do not replace official figures.
- Ask for an estimate that reflects your expected retirement date.
- Check that your service history is complete and accurate.
- Note how survivor benefit elections would change the monthly amount.
Common Terms
- Survivor annuity: A continuing payment to an eligible survivor, usually with a reduction to the retiree's annuity.
- Cost-of-living adjustment (COLA): A periodic increase intended to help payments keep pace with inflation.
- Deferred retirement: Leaving federal service with vested benefits and beginning the annuity at a later eligible age.
A Side-by-Side Example
The table below applies the general formulas to the same career: 30 years of creditable service and a high-3 average salary of $90,000. The numbers show why the two systems produce different basic annuities, and why FERS retirees need the other parts of their plan.
| System | Formula in brief | Basic annuity per year |
|---|---|---|
| FERS (standard) | 1% × 30 years × $90,000 | $27,000 |
| FERS (age 62+, 20+ years) | 1.1% × 30 years × $90,000 | $29,700 |
| CSRS | 56.25% of $90,000 | $50,625 |
A FERS employee would also have Social Security and TSP income, which the table does not show. The figures are illustrative and before survivor reductions, taxes and adjustments.
Unused Sick Leave
Unused sick leave can be credited as additional service when your annuity is computed. It generally increases the amount of the annuity, but it does not count toward the age and service requirements for retiring. Your sick leave balance at retirement is recorded in your agency’s records.
Survivor Annuities and Their Cost
A survivor annuity continues a payment to an eligible spouse or former spouse after the retiree dies. Providing one reduces the retiree’s own annuity. Under FERS, a maximum survivor benefit (50 percent of the annuity) generally reduces the retiree’s annuity by 10 percent, and a partial survivor benefit (25 percent) generally reduces it by 5 percent. Married retirees generally need the spouse’s consent to reduce or waive survivor coverage. This is one of the most important choices on the application, so discuss it with your household and confirm the details with OPM.
Cost-of-Living Adjustments
A cost-of-living adjustment (COLA) raises annuity payments to help them keep pace with inflation. CSRS retirees generally receive an adjustment based on the full increase in consumer prices. FERS COLAs use a different formula that is generally lower when inflation is high, and they usually begin at age 62 for most retirees. The rules are set by law, so check the current OPM information.
Taxes on an Annuity
Federal annuity payments are generally treated as taxable income, although part of the payment may be a return of contributions you already paid tax on. How that is calculated depends on your situation, and state tax rules differ. Ask a qualified tax professional how your annuity, TSP withdrawals and Social Security will combine in your tax return.
Common Mistakes to Avoid
- Treating a calculator result as an official figure instead of requesting an estimate from your retirement records.
- Forgetting that the annuity formula multiplies by years of service, so small gaps in service history change the result.
- Comparing FERS and CSRS basic annuities without counting Social Security and TSP income.
- Choosing survivor coverage without seeing how much it reduces your own monthly payment.
- Assuming a COLA will start immediately at retirement.
Frequently Asked Questions
What is the difference between an annuity and the TSP?
An annuity is a pension-style payment for life from the government retirement system. The TSP is an individual investment account whose balance depends on contributions and investment results.
Is the annuity formula the same for everyone?
No. It differs between FERS and CSRS, and special provisions apply to some law enforcement officers, firefighters and other groups. Always confirm the formula that applies to you.
Can my annuity go down?
Your annuity can be reduced by elections you make, such as survivor coverage, and by deductions for insurance premiums or taxes. The gross amount is generally adjusted upward over time through COLAs.
Where do I get an official estimate?
Your agency’s human resources office and OPM retirement services can provide an estimate based on your own records. Request one well before your planned retirement date.