• December 26, 2014, 1:31 PM ET

How to Save Like the Rich and the Upper Middle Class (Hint: It’s Not With Your House)

ByJosh Zumbrun (The Wall Street Journal)

The very rich often live in expensive houses, but that’s not where most of their wealth is.

In fact, for the wealthiest 1% of Americans, only about 9% of their total net worth is tied up in their home. That’s compared to 63% for the broad middle class.

That’s among the revealing findings of research, released earlier this month, from Edward Wolff, an economist at New York University who studies the wealth distribution. His work analyzed the Federal Reserve’s Survey of Consumer Finances to peek into the widely differing portfolios of the wealthiest 1%, the next 19%, which can be loosely thought of as the upper-middle class (though the top of this range is getting very wealthy as well), and the middle 60%, or the broad middle class.

The top 1% of Americans–who have a net worth of more than $7.8 million–hold nearly half their gross assets in unincorporated business equity and other real estate. They have an additional 27% of wealth in financial securities, such as corporate stock, mutual funds and personal trusts.

But typically, little of their wealth is tied up in their personal residences.

For the middle class, the picture could hardly be more different. Nearly two-thirds of their wealth is in their residences. It’s easy to see why: Imagine a young family with a $200,000 home, a $150,000 mortgage, and $50,000 in cash and retirement accounts. That’s not a family that’s putting their bottom dollar into their home. But that family would have 80% of their gross assets in their principal residence.

The upper-middle class has a very different financial profile as well. The “next 19%”–those with more than $400,000 in assets, but less than $7.8 million–have less tied up in business equity and financial securities than the rich, and less tied up in housing than the middle class. But comparatively, they have more of their wealth–hundreds of thousands to millions of dollars–in their pension accounts (which includes accounts like IRAs, Keogh plans, 401(k)s, defined contribution pension plans).

Mr. Wolff’s data also shows the total share of assets held by different wealth classes. Here he uses the breakdown of the top 1%, the next 9% and the remaining 90%. The only assets that are majority owned by the middle class are primary residences. Pension accounts and life insurance also remain major middle-class assets.

The research helps explain part of why the recent recession, which hinged on a housing bust, was so much more difficult for the middle class than a typical recession. It also helps explains why the recovery has been so disappointing to many. Housing has regained its ground only slowly while corporate profitability has boomed. In other words, we’ve seen slow growth in the major middle class asset, but substantial growth in the assets held by the wealthiest.

Scott's comment:

I think there is a powerful argument for diversification here. Why are the wealthy getting wealthier? because they are more broadly diversified and less susceptible to the decline in the value of one particular asset class. With the Bank of Canada suggesting that a 30% correction in the housing market is possible, there is a great deal of re-thinking of the family balance sheet that may be needed. If your home value is greater than 50% of your total net worth, you may be handcuffing your potential for future growth.

Worth thinking about.....