Mass-affluent households miss out on liquidity of taxable accounts, study finds

Most mass-affluent households with $250,000 to $1 million in investable assets are missing out on taxable accounts and resulting liquidity, unlike households under age 35, according to a new research report by Hearts & Wallets.

The “Portrait™ of U.S. Household Wealth: Sizing Opportunities from Retirement to High Net Worth and Exploring the Role of Real Estate” report, finds an emerging 3-year trend of U.S. household taxable assets growing faster than retirement assets. This is reversing a 10-year trend, with real estate net equity also representing a bigger portion of wealth than retirement assets.

The 129 million households in the United States make decisions on $68.6 trillion in investable assets. In 2022, 2 out of 3 of those dollars are in taxable accounts (65%), and the remainder are in retirement accounts (35%), the survey said.

Taxable assets outpace retirement assets

Growth in taxable assets outpaced retirement assets over the past 3 years (8.2% for taxable vs. 5.6% for retirement), in large part because of the market run-up during COVID, which further intensified wealth concentration. Retirement registrations are now over half of investable assets in mid-asset ranges, while low- and high-asset ranges favor taxable accounts.

Liquidity is lacking across mass-affluent U.S. households, according to the report. Taxable brokerage is an important holding place for taxable assets. Yet 37% of mass-affluent households do not have any assets in taxable brokerage, and 14% hold less than 10% of their assets in taxable brokerage accounts in 2022.

In contrast, nearly a fifth (18%) of households with $1 million to $10 million have over half of their investable assets in taxable brokerage accounts in 2022.

Younger households see liquidity benefits

Younger households under age 35 are awakening to the benefits of liquidity offered by taxable accounts, including taxable brokerage, the report said. Nearly one third (29%) of younger mass-affluent households hold 50% or more of their portfolios in taxable brokerage accounts, in contrast to 4% of mass-affluent households ages 44 to 54.

“More mass affluent households should look closely at the advantages of liquid taxable brokerage assets, taking a page from the playbook of younger households,” Laura Varas, CEO and founder of Hearts & Wallets, said. “The benefits of liquidity and tax deferral need to be balanced. Liquidity may be more important for certain households than the current diversification across tax registrations, and advice should reflect this.”

Growing role of real estate and identifying business opportunities
The research also analyzes the growing role that real estate net equity plays in household wealth, with real estate net equity now representing a bigger portion (23%) of household wealth than retirement assets (19%).

Sizing examples within the report illustrate how the latest Portrait data can identify market opportunities, including for “mass affluent” households under age 55 who are excellent savers ($10,000-plus per year) and wealthy households ($5 million to under $10 million) who are dissatisfied with their current main financial-services provider. The sizing draws upon the Portrait Grid™, which allows mutually exclusive and collectively exhaustive (MECE) segmentation of numerous age-asset segments.

The Portrait™ of U.S. Household Wealth: Sizing Opportunities from Retirement to High Net Worth and Exploring the Role of Real Estate report is drawn from the latest data from Federal Reserve Financial Accounts of the United States (“Z.1”), U.S. Census Bureau population estimates, Survey of Consumer Finances (“SCF”) and the Hearts & Wallets Investor Quantitative™ (IQ) Database, with over 120 million data points on saving, investing and advice behaviors from 70,000 U.S. households dating back to 2010. The latest IQ™ Database survey wave consists of 5,993 U.S. households and was fielded Aug. 15 to Sept. 15, 2022.

The report provides insight into growth and concentration trends for U.S. household assets. This research allows sizing of retail investor segments and the demand for solutions, with an expanded visibility into assets by account and households with $5 million to under $10 million in 2022.

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

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