When you’re saving for retirement, one of the general rules of thumb is the longer you have before you stop working, the more risk you can afford to take.

In other words, if you have more time to ride out the stock market’s ups-and-downs and potentially grow your wealth, you should probably keep more of your money invested in stocks. When you get closer to retirement, it’s safest to pare back riskier holdings, keeping more in cash.

But new data from retirement services firm Empower shows the exact opposite is happening: Cash is king for twenty-somethings, with investors in their 20s holding more of their assets in cash — almost 27% — than any age group except retirees 70 or older.

And it’s not because they don’t have spare cash to invest: The median cash balance for investors in their 20s is $40,725, according to the data.

It seems more likely that these young people are wary of taking on risk — especially considering that many of them came of age over the past five years, as the pandemic and geopolitical turmoil fueled economic uncertainty.

So what? While investing comes with risk, there is a risk to not investing enough too. This is especially true for young people, who can miss potential opportunities to grow their wealth if they keep too much of their money in cash.

“Time can either be your best friend or worst enemy,” said Brian Walsh, a Certified Financial Planner® and SoFi’s Head of Advice & Planning. “Make it your best friend by investing early so your money has more time to grow.”

Some advisors recommend keeping between 2% and 10% of your portfolio in cash. But the right allocation for you depends on many factors, including how long before you need your money, your financial goals, and your own personal risk tolerance.

Here are some things to consider when gauging the mix of cash (and cash equivalents) versus investments in your portfolio. Remember, there’s always a risk-reward tradeoff.

Decide what you actually need to have in cash. Financial advisors generally recommend having enough liquid cash to cover three to six months’ worth of living expenses, in case something unexpected happens. It may make sense to hold onto even more if your income isn’t steady or if you’re making a big purchase (like a house) soon.

Consider your risk tolerance. Ask yourself what you want to achieve with your investible assets. Are you happy collecting interest in a high-yield savings account, or are you willing and able to take a risk and invest it in the market in exchange for the possibility of higher returns?

People talk about the opportunity cost of not investing in the U.S. stock market because, despite its ups and downs — especially in recent months — the S&P 500 index has trended up over time. Returns vary widely, but historically, the average annualized return is about 10% per year, or 6% to 7% after inflation (not accounting for fees, expenses, and taxes).

Don’t forget inflation. Cash tends to lose value over time because of inflation. And although holding on to large sums can shield you from volatility, you’re giving up potential growth along with potential losses. If you don’t need the money right now, putting it to work can help you reach your goals faster (think buying a house, saving for your kid’s college tuition, or having financial security in retirement).

Weigh your time horizon. Whether it’s retirement or something else, it’s key to know how long you have before you’ll need to cash out your investments. One approach is to subtract your age from 110 to gauge how much money you should keep in stocks. For example, if you’re 25, you would keep 85% of your money in stocks because 110-25= 85.

In the end, there is no single strategy that works for everyone, or even one strategy that works for a lifetime. Make sure you reassess as you age and your goals and financial situation shifts.

Related Reading

•  How to Conquer Your Fear of Investing and Start Growing Your Portfolio (Investopedia)

•  Is Holding Too Much Cash a Mistake? Here’s Why That May Lead to Regrets, Experts Say (CNBC)

•  What Are Gen Zers’ Attitudes Toward Money? (Empower)

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