The need for budgeting doesn’t disappear when you retire. In fact, it’s even more important to keep track of where your money is going when you no longer have money coming in from a job.

So if you’re nearing retirement, partially retired or no longer working, here’s how to create a budget for retirement and stick to it.

Determine guaranteed sources of income

To budget for retirement, start by determining how much money you’ll have coming in each month from guaranteed sources of income—such as Social Security benefits, a pension or an annuity.

If you’re still working, you can find out what your monthly Social Security benefit will be by creating a my Social Security account at SSA.gov. It will show what the amount will be depending on whether you retire early at age 62, at your full retirement age (which varies depending on the year you were born) or if you delay benefits until age 70.

If you expect to receive a pension, the amount you receive will likely depend on the payout option you choose: a lump-sum payment, a single-life option that produces a stream of lifetime payments that end when the pension recipient dies, or a joint and survivor payout that will continue to provide payments for a surviving spouse when the pension recipient dies. Choosing the single-life option will produce bigger monthly payments but will leave a surviving spouse with nothing. A joint and survivor payout will reduce the monthly payment but ensure the surviving spouse receives 50% to 100% of the monthly payment the pension recipient was receiving.

Knowing in advance which pension payout option you want and what the benefit amount will be will help you determine how much income you can count on in retirement. The same goes for any annuities you might have purchased that will provide a steady stream of income in retirement.

Review existing essential and nonessential expenses

Make a list of all of your essential expenses, such as rent or mortgage, utilities, food, transportation and health care. Include any debts and insurance premiums you must pay. Also, consider including a certain dollar amount you can set aside each month for emergencies as part of your essential expenses. You’ll need an emergency fund (if you don’t have one already) to cover unexpected costs as they arise.

After tallying up your essential expenses, figure out how much you’re spending on average each month on nonessential expenses, such as dining out, entertainment and travel. If you haven’t retired yet, discretionary spending might increase once you’re no longer working and have more free time. So keep that in mind as you estimate your nonessential expenses.

Consider how your expenses could change

Keep in mind that some of your expenses in retirement could change over time. For example, your housing costs could drop if you move to a smaller house or apartment—or they could rise if you move to a warmer locale close to the water. New hobbies might mean more expenses.

The biggest change will be your health care spending, which likely will increase as you age. An average 65-year-old couple who retired in 2021 can be expected to have $300,000 in health care costs over their retirement, according to the Fidelity Retiree Health Care Cost Estimate.   Medicare won’t cover all of those costs. Plus, Medicare itself isn’t free.

There is no monthly premium for Medicare Part A. However, it provides only hospital coverage, and there’s currently a $1,556 deductible you have to pay for hospital stays before coverage kicks in. Medicare Part B, which provides coverage for doctor’s visits, outpatient care, medical supplies and preventative services, has a premium of $170.10 a month or higher, depending on your income level. To get prescription drug coverage, you’ll need Medicare Part D or a Medicare Advantage plan that is administered by a private insurance company. The cost for those plans vary.

As you list out expenses in retirement, give yourself some wiggle room to account for changes in expenses.

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Ensure guaranteed income covers essential expenses

Ideally, your guaranteed sources of income should cover all of your essential expenses. If guaranteed income can cover both essential and nonessential expenses, you’re set—as long as no major unexpected expenses crop up (more on that below).

If not, you’ll need other sources of income, or you’ll need to find ways to reduce your expenses—or both.

Fill any gaps between expenses and income

Retirement savings can help fill the gap between expenses and guaranteed source of income. To figure out how long your savings or investments will last, you need to know the rate at which you will withdraw money.

First, determine how much your monthly spending exceeds your guaranteed sources of income. Let’s say you’ll need to withdraw $1,000 a month—$12,000 a year—from savings or investments to fill the gap. Divide that number by the total amount you have in savings. If you have $100,000 in savings, the calculation would look like this: 12,000/100,000=0.12. Multiply that by 100 to get the withdrawal rate: 12%.

If that $100,000 is in a savings account earning 0.1% and you are withdrawing 12% a year, you would run out of money after eight years and five months. If your money is invested in stocks and earning 7% annually, it would last 12 years and three months with a 12% withdrawal rate. In either scenario, your savings wouldn’t last long if your withdrawal rate was so high. Financial advisors typically recommend withdrawing only 3% to 4% annually to ensure that savings last for a few decades. You can use Bankrate’s savings withdrawal calculator to figure out how long your savings will last.

If your retirement savings won’t be enough to fill the gap, consider working longer if you aren’t retired yet to continue saving and to shorten the period you’ll need to withdraw from savings. You also could work part-time in retirement to boost your income and cover expenses.

Look for ways to reduce expenses

Because housing typically is the biggest expense, consider downsizing sooner rather than later. If you’re still working, this will allow you to free up room in your current budget to save more for retirement. If you’re already retired, moving to a smaller home might not only help free up money to cover essential expenses but also allow for more discretionary spending.

You can save money on health care by taking steps to stay as healthy as possible, such as exercising, eating well and ditching bad habits. Also, choosing the right Medicare plan can help you save money. Consider working with a Medicare advisory service such as Boomer Benefits or Chapter to compare your options.

There are plenty of other ways to cut costs in retirement, from opting for cheaper cell phone service to reshopping insurance policies to find lower rates to taking advantage of senior discounts. Find out more in 12 Ways Retirees Can Save Money.

Prepare for unexpected expenses

As mentioned above, your budget should include a certain amount you can set aside each month into an emergency fund if you don’t already have cash for unexpected expenses. Make sure you have at least enough to cover all of your Medicare and insurance deductibles. However, it’s a good idea to have an emergency fund that’s large enough to cover the gap between expenses and guaranteed sources of income for several months in case there is a market downturn and your retirement savings take a hit.

You also should plan for the possibility that you will need long-term care services if you develop a condition or disability that forces you to rely on others for care. According to the Department of Health and Human Services,more than half of adults 65 and older will need this sort of care, and it can cost several thousand dollars a month.

Medicare doesn’t cover long-term care. So the high cost of this care can quickly eat up all of your guaranteed sources of income and drain your retirement savings if you have to pay for it out of pocket. If you’re still in your 50s or 60s, you might qualify for a long-term care insurance policy that can help cover the cost of care. Otherwise, consider meeting with an elder law attorney to discuss what steps you can take to qualify for Medicaid, which does cover the cost of long-term care.

Put your budget into action

Once you’ve listed your sources of guaranteed income and your expenses and developed a plan to fill any gaps with additional income or spending cuts, check in regularly to make sure you’re staying on track.

An easy way to ensure that essential expenses are covered is to set up automatic payments for as many bills as possible. And set up monthly transfers from your checking account to a savings account to build an emergency fund.  Then you can link your accounts to a service such as Carefull, which will monitor all of your transactions for any money mistakes and alert you if income that is scheduled to come in won’t be enough to cover bills that are scheduled to be paid.

If you’re having trouble sticking to your budget, look for tweaks you can make. You might need to meet with a financial advisor who can help you fine tune your retirement income plan and budget. You can search for fee-only fiduciary advisors near you by using a free service such as Wealthramp, the Garrett Planning Network and the National Association of Personal Financial Advisors. Or if you need more financial support, use the Eldercare Locator to be connected with services in your community for older adults.

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