Is locality pay included in FERS retirement? This is a common question among federal employees who are planning for their retirement. Understanding how locality pay affects your retirement benefits is crucial for making informed decisions about your financial future.
Federal Employees Retirement System (FERS) is a comprehensive retirement plan that provides three components: Basic Benefit Plan, Social Security, and Thrift Savings Plan (TSP). Locality pay, also known as geographic pay, is an additional pay that federal employees receive to compensate for the higher cost of living in certain areas. The question of whether locality pay is included in FERS retirement is significant because it can impact the overall retirement income an employee will receive.
Locality pay is not directly included in the calculation of your FERS retirement benefits. However, it plays a crucial role in determining your total compensation, which in turn affects your retirement income. When calculating your retirement benefits, the Office of Personnel Management (OPM) uses your highest three years of average salary, known as the high-3 average salary, to determine your annuity.
In this calculation, locality pay is considered part of your base salary. This means that when you receive locality pay, it is included in the high-3 average salary, which is then used to calculate your retirement annuity. However, locality pay is not factored into the Social Security portion of your retirement benefits.
It is important to note that while locality pay is not directly included in your FERS retirement benefits, it can significantly increase your overall retirement income. For example, if you are receiving locality pay of 25% of your base salary, your high-3 average salary will be higher, resulting in a larger retirement annuity.
Additionally, locality pay can also affect your Thrift Savings Plan (TSP) contributions. Federal employees are required to contribute a certain percentage of their base salary to their TSP accounts, and locality pay is included in this calculation. Therefore, the higher your base salary, the more you can contribute to your TSP, which can further enhance your retirement savings.
In conclusion, while locality pay is not directly included in FERS retirement benefits, it plays a vital role in determining your retirement income. Understanding how locality pay affects your retirement benefits can help you make informed decisions about your financial future and ensure a comfortable retirement.
