Locality pay and your pension

1. Why locality reaches your pension

Your annuity comes from three numbers:

The high-3 is the average of your highest three consecutive years of basic pay. And under 5 U.S.C. 5304, locality pay is basic pay for retirement purposes. It is not a separate allowance sitting outside the formula, the way a recruitment bonus or overtime does.

So the geography of your last three years is permanently priced into your pension. A GS-13 step 5 in San Francisco and a GS-13 step 5 in rural Missouri did the same job at the same grade for the same number of years, and one retires with a materially larger annuity. Whether that is fair is a separate argument; that it is how the formula works is not in dispute.

2. The spread, in dollars

Take a GS-13 step 5 with 30 years of service, retiring at 62 so the 1.1% multiplier applies.

Rates are approximate and change annually; check the current OPM pay tables for your area. The pattern is the point: about $9,000 a year separates the top and bottom rows, forever, from geography alone.

Over a 25-year retirement, before any cost-of-living adjustment, that is roughly $231,000. With COLAs applied to the larger base, more.

3. Everything else locality touches

The TSP line compounds quietly over a career. A 5% agency match on a San Francisco salary contributes thousands more per year than the same match in a low-locality area, and that difference has decades to grow.

4. What the 2027 freeze does

The alternative pay plan holds both base and locality at 2026 rates for 2027. Locality percentages do not move.

That matters more in a high-locality area, because locality is a larger share of the total. A San Francisco GS-13 has roughly 45% of base pay riding on the locality figure; a Rest of U.S. employee has about 17%. Freezing it holds a bigger number still.

The practical consequence for anyone near retirement: staying an extra year no longer grows your high-3 through pay adjustments. It still adds a year of service credit, and a within-grade step increase still raises basic pay on schedule. But the annual raise, which normally does the heavy lifting on the high-3, is absent. The full stay-or-go math is in retire now or wait, and the calendar is in best dates to retire in 2027.

5. Can you move to boost your high-3?

In principle, yes. The high-3 uses your highest three consecutive years of basic pay, wherever earned, so three full years in a higher locality area at the end of a career would raise it.

In practice, four things get in the way:

• It has to be three full years. Two years and eleven months in San Francisco followed by retirement leaves the third year at your old rate, and the average reflects that.
• Locality follows the official duty station of the position, not where you happen to live. A detail or a temporary assignment usually does not change it.
• Remote work generally does not help. For a remote employee, locality is based on the location where the employee actually works, so living in a high-locality area while holding a position elsewhere does not automatically deliver the higher rate — and agencies have been tightening this.
• The cost of living is real. Three years of San Francisco housing against a $9,000 annual annuity gain is not an obvious trade, and the annuity gain only begins once you retire.

Where it does work: an employee who was already going to compete for a position in a higher-locality area, and can time the move at least three years before retiring. Treat the pension effect as a bonus on a move you had reasons to make anyway, not as the reason.

6. Retiring to a cheaper state

The reverse question comes up more often, and the answer is cleaner: your annuity does not change when you move. Locality pay stops when your salary stops. The high-3 is already fixed, and the annuity computed from it is a single national figure. COLAs are national too.

So earning in a high-locality area and retiring somewhere inexpensive is the strongest version of this strategy, and it requires no planning beyond where you already work. What does change is state tax: some states do not tax federal annuities at all, others tax them fully. That is worth several thousand dollars a year on its own, and it is covered in state taxes on federal retirement income.

7. What to check before you retire

• Confirm the locality area on your SF-50, not the one you assume from your mailing address. Area boundaries include specific counties and they change.
• Identify your actual high-3 window. It is the highest three consecutive years, which is usually but not always your last three — a move to a lower-locality area late in a career can shift it earlier.
• Check your step date. In a freeze year, a within-grade increase is the only thing still raising basic pay.
• Ask HR for your computed high-3 in writing before you file, and check it against your own math.
• Look at your leave balance. The lump sum is paid at your hourly rate including locality, so a large balance is worth more in a high-locality area.

The mechanics of how the high-3 is built, including what counts and what does not, are in the FERS pension calculation.

8. Frequently asked questions