(FORTUNE Magazine) – In many respects we are a nation of planners. We delight in planning our vacation, our wedding, our dream house. And why not? All these things involve spending money, America's favorite pastime. But when it comes to our retirement, let's face it: Most of us just wing it. After all, planning for retirement involves saving money and, well, where's the fun in that? Consider: Only 44% of workers recently surveyed by John Hancock Financial Services have a specific plan for the way they invest the money in their 401(k)s. Even among those who say they are aiming for a certain mix of assets--so much in stocks, so much in bonds, for example--fewer than 25% are hitting their target. "People have set their retirement plans on autopilot," says Wayne Gates, an economist at John Hancock, "and they don't know if their instruments are properly calibrated."

You might ask whether that's really such a tragedy. Visit Florida, Arizona, or any graybeard mecca, and you'll find it teeming with prosperous seniors who never dreamed of constructing the kind of retirement plan envisioned by the worrywarts at John Hancock. If you're 40 and shunting 6% of every paycheck into your 401(k), you're probably doing more than your parents ever did to prepare for retirement. Why not leave it at that?

The answer is simple: This is not your father's retirement scene. The G.I. Generation and their younger siblings in the Silent Generation reached retirement armed with old-fashioned corporate pensions (the kind that pay a fixed monthly income for life), houses that had appreciated like Internet stocks, and a Social Security system that seemed to get more generous with each new act of Congress (see "Born to Retire" later in this guide). Those days are over.

Today, if you don't plan for your retirement dreams, you risk waking up at age 55 to find they are simply unattainable. According to a new study by the Employee Benefits Research Institute (EBRI), people who have taken the trouble to figure out how much money they will need for their golden years have accumulated nearly five times as much as those who never tried to do so. Why? Probably because the analysis opened their eyes to how much more they should be saving. Unfortunately, barely half of American workers have even made a stab at determining a price tag for the kind of retirement they want to have.

That may be the main reason they remain so confident they will have enough to live comfortably throughout their retirement. According to the John Hancock study, nearly two-thirds of workers expect to retire before age 65 and are, at most, only somewhat concerned about their finances thereafter.

They may be in for a shock.

"Most people don't have a clue about how much money it takes to retire," observes Ron Roge, a financial planner in Bohemia, N.Y. And how much is that? Roge calculates that wage earners not covered by an old-fashioned, employer-funded pension plan will need investments of at least $1.5 million in 1999 dollars (excluding home equity) to supplement Social Security beginning at age 62. And that's just for a modest retirement, with expenses of perhaps $50,000 a year.

Roge's calculation is miles above the couple of hundred thousand dollars many people think they'll need to save. But then, most people forget to factor in taxes, inflation, and increased life expectancy, says Roge, all of which put an extra burden on your nest egg. Remember, you don't really own all that money in your 401(k) or traditional IRA. You can't lay your hands on those accounts without paying income taxes on them at your maximum tax rate. That knocks at least 30% or so right off the top. Then there's inflation, which guarantees that your retirement income will have to rise yearly just to keep you in the same place. And that income will have to keep rising longer than you might expect. It's not inconceivable that you could spend one-third or more of your life retired.

The good news is, imposing as all this sounds, a prosperous retirement is well within reach--if you have a plan. And the key to a successful plan? Simplicity. That's right. The dirty little secret of the investing world is that the best strategies are also the simplest. Too often we get caught up in the day-to-day numbers: How many points the Dow rose or fell, how many millionaires were hatched in the latest IPO. But the fact is, when it comes to saving for retirement, your investment horizon is so long that you don't have to worry about the chatter on CNBC. From one week to the next, some investments will be winners and some not, but over the 20 or 30 years you will be investing, it should all wash out.

In his new book, Common Sense on Mutual Funds, John Bogle, founder of the Vanguard Group and a 50-year veteran of the investing business, calls simplicity "the master key to financial success." He is convinced that investors complicate things needlessly by recklessly chasing unrealistic performance. "As they complicate the process, they increase the likelihood of stumbling down an ill-lit path to disappointment," he writes. "Follow a simple plan, and let the cycles of the market take their course."

In the same spirit of simplicity, we offer you our six-step program for retiring rich. It begins with an intelligent calculation of your retirement's price tag and continues with five investing guidelines that can ensure you'll have the money to pay the bill.

FIND OUT HOW BIG IS BIG ENOUGH

How large does my nest egg have to be before I can call it quits? This question goes to the heart of your entire plan, but few people even ask it, let alone try to answer it. Like much else in retirement planning, answering the riddle is simpler than it seems. The way to start is by deciding how well you want to live once you leave work.

For most people the goal is to live at least as well in retirement as during their peak earning years. Because in retirement you no longer have to pay commuting costs and other work-related expenses--and because once you're in your golden years you can finally stop saving for them--you can maintain your current standard of living in retirement with less than your current income. Researchers at Georgia State University and Aon Consulting have found that a married couple needs roughly 65% to 85% of their preretirement gross to keep up their lifestyle (see chart, page 56).

This so-called replacement ratio starts out high but drops quickly for those with middling incomes. It then rises again for those approaching the six-figure bracket. For example, a worker now making $60,000 could retire without breaking stride on about 67% of his current wages. His boss, making $150,000, would need about 80%. The main reason: taxes. A rich retiree needs more pretax dollars than others to keep the IRS happy and maintain a preretirement standard of living.

Use those numbers as a starting point, then factor in the retirement life you want to live. You may decide you need 100% of your preretirement income, at least for the years right after you quit working. Sure, you'll spend less on power ties and commuting, but you may spend more on restaurants and vacations.

Don't expect Social Security to shoulder much of the burden. It already accounts for less than 25% of retirement income for someone whose preretirement wage was $90,000, vs. 40% for the average retiree. And although the age at which you can receive maximum Social Security benefits is already set to rise from 65 today to 67 by 2022, it is obvious to everyone but other gray-lobby hard-liners that the retirement age will need to be raised further or benefits reduced. Otherwise Social Security will collapse under the weight of the baby boom.

You probably already suspected as much. Only 12% of workers say they expect Social Security to be their most important source of income when they retire, according to the EBRI study. Half of workers, compared with 18% of retirees, say their most important source will be personal savings, either through a plan at work, such as a 401(k), or other investments.

Just how big will that pot of savings have to be to meet your income goal? Well, there are plenty of software programs and Websites (not to mention eager financial consultants) that can help you make that nest egg calculation, but be careful here. The standard formula yields seemingly precise, but dangerously misleading answers. For example, if you're 40 and want a retirement income that starts out at $50,000 and lasts 40 years, you might be told you need to amass $1.1 million in savings and that you will need to save $24,200 a year from now until you're 60. What you might not be told is that this number will be wrong fully half the time. That is, there is a 50% chance that $24,200 a year won't build you a nest egg of $1.1 million. Even if it does, there's a 50% chance that $1.1 million won't suffice to produce the income you want for as long as you need it.

The reason, of course, is that your exact investment return is unknowable--both before your retirement and during it. For example, your money may average 8% a year in the long run, but it won't earn 8% every year. Since you will be continually putting money in and taking it out over your lifetime, the real growth of your account depends on the sequence of returns over time. If high returns come when your assets are peaking, you're in luck; if low returns strike at that time, you'll have less.

What you really need to find out, then, is this: Given the uncertainty of any investment projection, what must you do to have a reasonable chance of reaching your goal? To illustrate a realistic approach to the question, financial planner Christopher Cordaro of Bugen Stuart Korn & Cordaro in Chatham, N.J., produced two sets of numbers (see charts). The first gives a range of probabilities that your money will last as long as you want. For example, say you think you'll need $100,000 annually for 40 years of retirement. With a $2.3 million nest egg, there is a 50% chance your assets will last at least 40 years. That is the savings target that the standard calculation methods would churn out. If you want to be 90% certain you won't outlive your money, however, you'll need to accumulate $3.5 million.

The second set of numbers shows how much you must save each year to have a reasonable chance of accumulating your retirement stash by your target age. Say you are 20 years from quitting time and need a sum of $1 million by then. You'll have a 50% chance of getting there if you save $22,000 a year. If you're willing to salt away $30,000 a year, your chances improve to 90%.

Cordaro assumed a typical investment mix of 60% stocks and 40% bonds for an 8% average annual return. A computer then generated thousands of scenarios for each year's results, factoring in the historical variation in returns for that kind of portfolio. A few other planning firms use the same kind of analysis, known as the Monte Carlo method. One of them, an online investment advisory firm known as Financial Engines, will let you test-drive free. Simply log on to financialengines.com, plug in data as requested, and you'll get back an analysis detailing the probability that your strategy will put your retirement dreams within reach.

The beauty of the Monte Carlo simulation is that it acknowledges the uncertainty inherent in any financial projection. As a result, it affords a more honest and ultimately a simpler way of sizing up your retirement-planning needs: Decide how much uncertainty you can live with and adjust your plan accordingly.

Which brings us to step two.

SAVE

If you believe what you read in most of the financial press, you'd conclude that you're not really investing unless you're getting returns that beat the market. Relax. While we would all take blistering returns if we could get them, the truth is, we don't need them. It is much easier simply to save enough to begin with and let the power of compounding work its proverbial magic. Time is your greatest ally in this respect. A few decades can transform even a little periodic savings into a tremendous amount. But if you have only a little time before retirement, you need to save a lot.

Consider this example (the basis for the chart below), which was prepared for us by Financial Engines. A man wants to retire at age 65 with an inflation-adjusted retirement income of $100,000. To do that, he contributes $10,000 a year to his 401(k) plan, the maximum allowed by law, allocating all the money to an S&P 500 index fund. If he starts contributing to the plan at age 30, he will have a 35% chance of reaching his goal with his 401(k) contributions alone. (Add in Social Security and a typical employer's matching contribution, and his chances of reaching $100,000 rise to 55%.)

Now look what happens if he doesn't start contributing until he is 40. In that case he will have less than a 5% chance of reaching his $100,000 goal. To have the same 35% chance of hitting the mark that he had at age 30, he'll have to more than double his savings to $21,000 per year. But since he's already maxing out his 401(k) contributions, the additional money will have to be invested in an after-tax account. Assuming he's in the 30% tax bracket, that would mean he'd actually need to come up with a total of $25,700 to be able to invest the whole $21,000.

The moral is obvious: It's much easier to get an early start.

GO FOR GROWTH

As anyone who hasn't been living in a cave already knows, stocks have outperformed every other major financial asset class over the long haul. It follows that any long-term investor should make a serious commitment to stocks, and indeed most retirement investors have got the message. Three-quarters of the respondents to the John Hancock survey said they invested at least part of their 401(k) in equities, more than double the proportion invested in any other investment option and up from 42% in 1992. Trouble is, again, investors appear to have no real plan here.

For one thing, they may be getting too much of a good thing. On average they think 47% of one's portfolio should be in equities, yet 57% admit they invest more than that. "This suggests people aren't thinking about having a target mix and sticking with it," says Hancock's Gates. "It's a let-it-ride philosophy. They're leaving their stock gains on the table." At the same time, investors seem too ready to bail. In the wake of a market decline of 10% or more, most say they would transfer money out of the stock market or allocate less of their future contributions to stocks. "If they had a plan, they'd be doing the opposite or sitting tight," notes Gates.

Financial planners say you should keep at least half your portfolio invested in stocks at all times. The classic "balanced" mix of assets is 60% stocks, 40% bonds. But a daredevil twentysomething investor just starting to accumulate assets might plunge 100% in stocks, while a nervous Nellie retiree with plenty of assets already on hand might scale back to just 30%--but never less than that.

DIVERSIFY

In their new book, Getting Rich in America, economists Dwight R. Lee and Richard B. McKenzie advocate taking what they call "prudent risks," meaning only those risks that have real potential to increase your return. Loading up on one kind of equity (like, say, Internet stocks) or a single issue--say, all that employer stock in your 401(k)--is an example of risk taking that doesn't sufficiently increase your expected return. The results from such concentrated gambles range from moonshot gains to total wipeout, depending on wholly unforeseeable events.

On the other hand, diversifying your stock holdings--owning a mix of large, small, and foreign stocks--is a way of converting the market's unpredictability into a prudent risk. Sure, the market as a whole can still go through rough patches. But because random good luck in one stock can offset the opposite in another, a carefully diversified portfolio ensures a performance that roughly tracks the market as a whole and eliminates the possibility of truly disastrous returns.

If you have the money and the inclination, you can try your hand at assembling a portfolio of individual stocks (for suggestions, see "Ten Stocks to Grow With" in this issue). But bear in mind you'll need to spread your money among at least 15 stocks to be fully diversified.

A simpler alternative is to buy index funds. Remember, you're not trying to beat the market here. You need only to buy in, and index funds basically guarantee you 98% of the market's return. These days, thanks to the surge of interest in indexing, it is easy to cobble together a portfolio of market-tracking funds. You might put three-quarters of the money in a fund that tracks the Wilshire 5000 index, which is composed of nearly all publicly traded U.S. stocks, and the remaining quarter in a broad-based international-stock index fund. Schwab and Vanguard sell both kinds. Meanwhile, Fidelity just rolled out a fund of index funds that invests 55% in a fund that seeks to match the S&P 500 index and 15% each in an international-stock index fund, a U.S.-bond index fund, and a fund that reflects the performance of small and midsized company stocks.

Boring? Arguably so. But index funds allow you to have a life. If you're the type who thinks stock picking is fun and you're just dying to try your hand at day trading, divide your money into two accounts: a serious money account and a play money account. Stash the index funds in your serious money account; think of it as insurance for your retirement. Then, with your other account, go ahead and "play" the market. At least you'll be playing with money you can afford to lose.

KEEP COSTS DOWN

Every dollar you pay in sales commissions, investment management fees, trading costs, and taxes is a dollar not working for you. "You don't want your money going to buy mahogany paneling in somebody's office," says Christopher Jones, vice president of financial research at Financial Engines.

The long holding periods involved in retirement investing can magnify even slight differences in cost. Let's return to our 401(k) investor whose goal is to retire on $100,000 a year. Remember that by contributing $10,000 a year beginning at age 30, and allocating those contributions to an S&P 500 index fund, the investor has a 35% chance of reaching his goal. The index fund has low annual expenses, equal to 0.19% of assets.

Look what happens to a colleague who matches this investor in every respect except that he puts his savings in a typical equity fund, in which operating expenses consume 1.35% of assets each year. The chances of his reaching his $100,000 goal drop to 20% (see chart, "Keep an Eye on Costs"). To achieve his more frugal colleague's 35% chance of hitting his target, the second investor would have to increase his savings some 30%, to around $13,000. Again, he would have to invest the additional $3,000 after taxes, which would siphon $4,300 out of his income.

Bottom line: The lower-cost fund allows our investor to earn higher returns and--here's the beauty part--to do so without taking on any added risk.

BE PATIENT

Even the best plan will amount to nothing if you don't give it time to work. That means having the discipline to continue saving even when you are tempted to splurge on that 12th pair of Guccis. It means having the stomach to stay invested even when the market is in a tailspin. It means having the fortitude to maintain a diversified portfolio even when it looks as if Internet stocks are a sure thing. And it means keeping an eye on costs even in good times, when costs don't seem to matter. For all this, "you need tremendous patience," says Roge, the financial adviser.

Adopt a simple plan. Set the wheels in motion. Then, go live your life.