Retirement marks a significant shift in everyone’s financial priorities, moving from wealth accumulation to capital preservation and generating sustainable income. Understanding how to structure retirement income is critical for preparing investors in Boston and beyond for this phase of their lives. 

This article explores four key considerations:

1. Should I preserve my principal or spend down my assets in retirement?
2. How do I balance income from savings with Social Security benefits?
3. What’s the difference between relying on tax-free versus taxable income sources?
4. How do my risk tolerance and capacity change as I approach retirement?

These elements are central to Boston financial planning and help you sustain your financial future.

Read our latest Quick Guide: Wealth Management in Boston, MA: Protecting Your Wealth

Should I Preserve My Principal vs. Spending Down Assets in Retirement?

One of the first decisions in retirement planning is how to approach your nest egg: preserve the principal or spend it slowly over an extended period of time. 

Maintaining principal means living off the income generated by the assets—such as dividends, interest, or rental income—while keeping the core principal amount intact. This strategy can appeal to people who want financial security later in life, leave a legacy, or maintain a financial safety net. 

For example, let’s say you have $1 million in a diversified portfolio yielding 3% annually:

• After you retire, you could draw down up to $30,000 a year without touching the principal. This would help you protect the principal, which will generate income for the rest of your lives and provide an inheritance for your children.
• Conversely, spending down assets involves systematically withdrawing both income and principal, often guided by a rule like the 4% withdrawal rate. With $1 million, this could mean $40,000 annually, which is adjusted for inflation over time, with the expectation that the assets will last 25-30 years. If you’re comfortable depleting your savings over time, relying on Social Security or pensions as a backstop, this method may suit you. This strategy requires careful monitoring, as market downturns could accelerate depletion. 
• Keep in mind that rising longevity for healthier retirees can mean living well into their 90s—for one or both spouses.

SFA Insights: Your choice hinges on lifestyle goals, life expectancy, and comfort with spending principal—a discussion well worth having with our team of financial planners in Boston.

How do I Balance Income from Savings with Social Security Benefits?

A key question in retirement planning is how much income will come from personal savings versus Social Security. For many, Social Security provides a foundational income stream, with an average monthly benefit of around $1,900 in 2025, or roughly $22,800 annually. 

However, this rarely covers all expenses, especially in a higher-cost city like Boston, where annual living costs can easily exceed $50,000-$60,000 for a reasonably comfortable lifestyle. 

This is where financial planning in Boston can help you bridge this gap with savings.

The amount needed from savings depends on total expenses and the percent that is covered by Social Security. 

For instance, if you need $60,000 yearly and receive $22,800 from Social Security, your savings (IRAs, personal savings) must generate $37,200 annually. With a $1 million portfolio and a 4% withdrawal rate, this is feasible, but a smaller nest egg—like $500,000—yields only $20,000, falling well short of requirements. 

Financial planners in Boston might suggest stress-testing these numbers against inflation (historically 2-3% annually) and unexpected costs, such as healthcare, which studies show can top $300,000 over all of your retirement years.

Another alternative is to delay beginning Social Security benefits, as delaying claims until you have to make them can increase benefits up to 8% per year. 

What’s the difference between relying on tax-free versus taxable income sources?

The tax treatment of retirement income significantly affects how far your savings will stretch. 

Taxable sources include: 

• Withdrawals from traditional 401(k)s or IRAs, taxed as ordinary income (federal rates up to 37%, plus Massachusetts’ 5% flat tax).
• Social Security, which may be partially taxable if combined income exceeds $25,000 (single) or $32,000 (married).
• Interest from bonds or personal savings accounts also falls into this category. 

For example, if you withdraw $40,000 from a 401(k), taxes could reduce this to $32,000-$35,000, depending on your bracket.

Tax-free investment sources include: 

1. Roth IRA (Individual Retirement Account)

• • Contributions are made with after-tax dollars, but qualified withdrawals (after age 59½ and a 5-year holding period) are tax-free, including earnings. There are no taxes on growth from investments like stocks or funds within the account.

2. Roth 401(k) or Roth 403(b)

• • Similar to a Roth IRA, contributions are after-tax, and qualified withdrawals in retirement are tax-free. Offered through employers, these plans often have higher contribution limits than Roth IRAs ($23,500 in 2025, plus a $7,500 catch-up for those 50+).

3. Municipal Bonds

• • Debt securities in personal investment accounts issued by state or local governments (e.g., cities, counties). Interest is generally exempt from federal income tax and, if issued in your state of residence (e.g., Massachusetts bonds for Boston residents), often free of state tax, too. “Muni” bonds suit high earners seeking tax-efficient income.

4. Health Savings Account (HSA)

• • Contributions are pre-tax, growth is tax-free, and withdrawals are tax-free when used for qualified medical expenses. After age 65, non-medical withdrawals are penalty-free (though taxed as income), making it a hybrid tax-advantaged tool.

5. 529 College Savings Plan (grandchildren)

• • Earnings grow tax-free, and withdrawals are tax-free when used for qualified education expenses (e.g., tuition, books). Some states offer tax deductions on contributions, enhancing the tax benefit.

6. U.S. Savings Bonds (Series EE and I)

• • Interest is tax-free at the federal level if used for qualified higher education expenses (subject to income limits). Otherwise, interest is taxable when bonds are redeemed, or they mature, but the education exclusion offers a tax-free option.

7. Life Insurance Cash Value (Permanent Policies)

• • Permanent life insurance (e.g., whole or universal life) builds cash value that grows tax-deferred. Loans or withdrawals up to the premiums paid are tax-free; proceeds paid to beneficiaries upon death are also tax-free.

8. Education Savings Account (ESA)

• • Contributions are after-tax, but earnings grow tax-free, and withdrawals for education expenses (K-12 or college) are tax-free. Limited to $2,000 annually per beneficiary, with income phase-outs.

SFA Insights: Each option has specific rules—contribution limits, eligibility, or qualified use requirements—impacting an investment’s tax-free status. Consulting a financial advisor can clarify which alternatives best align with your retirement strategy.

How do my risk tolerance and risk capacity change as I approach retirement?

One of retirees’ biggest fears is outliving their money. So, defining your risk tolerance—how much volatility one can handle—and risk capacity—how much loss one can afford—declines as you near or enter retirement. 

In early accumulation years, a 35-year-old might favor an 80/20 stock-bond mix, accepting cyclical market swings for higher growth rates. By age 60, however, the focus often shifts to capital preservation, with portfolios leaning toward 60/40 or 50/50 stock/bond allocations. 

Risk capacity continues to decline in retirement years until your risk of outliving your principal is close to zero. With no income to replenish losses, a 20% market drop (e.g., $200,000 on a $1 million portfolio) could force reductions in current cost of living, cost of living cuts, and faster asset depletion. A 4% withdrawal rate assumes steady growth, but sequence-of-returns risk—where early retirement losses hit hardest—can derail even the best financial strategies. 

SFA Insights: Our Boston retirement planners may suggest buffers like cash reserves (1-2 years of expenses) or annuities for guaranteed income alongside conservative investments like short/intermediate bonds or higher dividend-paying stocks to offset potential risk.

Get to Know Sherr Financial Associates (SFA)

Sherr Financial Associates (SFA) specializes in guiding successful executives through the complexities of equity compensation strategies. Our Boston financial advisors understand the nuances of RSUs, ISOs, and NSOs, tailoring plans to optimize after-tax outcomes during your life’s asset accumulation and preservation phases. 

With personalized Boston financial planning, SFA empowers clients to navigate deferred compensation risks and build secure financial futures. Connect today to learn more.

This material is intended for informational and educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Any examples provided are hypothetical and for illustrative purposes only; no specific investments were used. Actual results may vary. Past performance is no guarantee of future results. Please contact your financial professional for information specific to your situation.