Thursday, 10 September 2020

Composition of Wealth: Middle Class vs. Ultra- Rich

A person’s wealth can be made up of many different assets. It can comprise of liquid savings, stocks, mutual funds, bonds, real estate, vehicles, retirement accounts (IRAs, pensions), and other types of assets. But how does the composition of net worth differ for a person with middle income compared with that of an ultra-rich?

The chart above breaks down the difference in the composition of wealth between middle income, upper income, and ultra-wealthy (top 1%) Americans.

Middle Income: Home is Where the Wealth is
For Americans in the middle class ($0 to $471k of net worth in 2017), principal residence is their main asset. For households that fall in this wide range the combination of housing and pension accounts make up nearly 80% of total wealth on average.

Assets like stocks and mutual funds only make up about 4% of wealth in this income bracket. As their income ladder moves up this situation changes.

Upper Income: A Diversified Portfolio
If a household has a net worth that ranges between $471,000 and $10.2 million, it is in the upper income band. This represents the 20% richest households in the U.S., minus the top 1%, which are put in a separate bracket.

For this group, the principal residence makes up a smaller slice of the wealth pie. Instead, we see a higher mix of financial assets like stocks and mutual funds, as well as business equity and real estate. Almost half of the households in this group own real estate in addition to their principal residence.

As households become wealthier, we tend to see a lower share of liquid assets as compared with the other components of net worth.

The Top 1%: The Business Equity Bulge
In the richest 1% of households, the principal residence makes up a mere 7.6% of assets. At this stage, almost half of their assets fall under the category of business equity and real estate.

A prime example of this is Jeff Bezos. The lion’s share of the Amazon founder’s net worth is tied to the value of his company. Another example is President Trump, whose sprawling real estate empire comprises two-thirds of his estimated $3.1 billion net worth.

One of the more prominent features of the ultra-rich wealth bracket is a much higher level of financial asset ownership. In fact, the top 1% of households own over 50% of the US equities.

1.     Nick Routley, How the Composition of Wealth Differs, from the Middle Class to the Top 1%,
2.     Jeff Desjardins, Chart: What Assets Make Up Wealth?

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