What Percentage of Your Income Should Go to Investments?

DEFINITION

Savings Rate

The percentage of gross (pre-tax) or net (after-tax) income that goes toward savings and investments. There is no universal standard for whether to calculate savings rate on gross or net income — being consistent matters more than which basis you choose.

DEFINITION

Tax-Advantaged Accounts

Investment accounts that receive favorable tax treatment: 401k and 403b (pre-tax contributions reduce current taxable income), Roth IRA (after-tax contributions grow and withdraw tax-free), HSA (triple tax advantage — deductible, tax-free growth, tax-free healthcare withdrawals). These are the highest-priority investment destinations for most earners.

DEFINITION

Taxable Brokerage Account

A standard investment account with no contribution limits, no tax advantages, and no withdrawal restrictions. Dividends and capital gains are taxed in the year they're realized. After maxing tax-advantaged options, taxable brokerage is where additional investment capital goes.

The 15% Rule Was Built for Someone Else

The rule of thumb — save 15-20% of gross income for retirement — originated from Social Security replacement rate assumptions that don’t apply to high earners.

Social Security replaces roughly 40-50% of pre-retirement income for median earners. For someone earning $250,000, Social Security might replace 10-15% of pre-retirement income, if that. The 15% savings rate assumes the rest comes from Social Security and (for previous generations) pensions. That math doesn’t work for high earners with high lifestyle expectations in retirement.

This isn’t a reason to panic — it’s a reason to save more aggressively than the conventional guidance suggests.

The Priority Stack

The question isn’t just how much to save. It’s where each dollar goes first.

Step 1: 401k to employer match Whatever percentage your employer matches, contribute at least that much. If your employer matches 4% of salary, the return on your first 4% contribution is 100% (instant doubling from the match). This is the highest-return investment available to you — prioritize it above everything else.

Step 2: HSA if eligible If you’re on a high-deductible health plan, an HSA is the most tax-efficient account available. Contributions are pre-tax, growth is tax-free, and withdrawals for qualified medical expenses are tax-free — a triple advantage no other account type provides. The annual limits ($4,300 individual / $8,550 family in 2025) are modest, but the long-term value of tax-free medical funds is significant.

Step 3: Max 401k Beyond the employer match, the full 401k contribution is $23,500 in 2025. For a traditional pre-tax contribution, this reduces your taxable income dollar-for-dollar — at a 32% or 37% federal bracket, the immediate tax savings are substantial.

Step 4: Backdoor Roth IRA High earners are typically above the income limits for direct Roth IRA contributions. The backdoor Roth conversion (contribute to traditional IRA, then convert to Roth) gets around this. The $7,000 limit is small in the context of high earner investing, but the tax-free growth over decades adds up. See the companion guide on backdoor Roth for mechanics.

Step 5: Mega backdoor Roth (if your 401k allows) Some 401k plans allow after-tax contributions up to the total plan limit ($70,000), which can then be converted to Roth within the plan. This is the mega backdoor Roth — potentially putting $40,000+ per year into Roth-equivalent accounts rather than the standard $7,000.

Step 6: Taxable brokerage After exhausting tax-advantaged options, additional investment capital goes to a taxable brokerage account. There are no contribution limits, no withdrawal restrictions, and no tax advantages. Long-term capital gains rates (0%, 15%, or 20% depending on income) are favorable compared to ordinary income rates, but not as favorable as Roth treatment.

High Earner Savings Rate Targets

For a high earner who wants to build significant wealth over a 20-30 year career, the math suggests:

At a 15% savings rate on $200,000 gross income: $30,000/year invested. At a 30% savings rate on $200,000 gross income: $60,000/year invested.

The difference in terminal wealth after 25 years at 7% real returns is roughly $770,000 vs $1.54 million. A doubling in terminal wealth from a savings rate decision made consistently.

The savings rate you set in your 30s — and maintain — matters more than the specific investments you choose or the timing of your market entry.

What to Watch For

Two common failure modes for high earners:

Lifestyle inflation absorbs every raise. Every income increase gets spent rather than invested. The percentage stays the same but so does the actual dollar amount invested. Watch the absolute dollars, not just the percentage.

Equity comp is treated as a windfall rather than an investment. RSU vests and bonuses get spent on vacations and renovations rather than being systematically invested. If your equity comp is substantial, it should be part of your investment plan, not separate from it.

Thalvi tracks both your regular contributions and your equity comp in one place — so you can see whether raises and vests are being directed toward wealth building or absorbed by spending.