Designing for iPhone (optimization for retina-display or focus on older versions)?

I need to craft a design for iPhone. The thing that I’m realizing is that iPhone 4 has retina display and resolution of 640×960px, while older versions have 320×480px. So I’m using an iPhone 4 PSD starter kit, but I wonder what would happen if the application is browsed from an older iPhone with smaller resolution. For example, I’m aware that optimal tappable space is considered to be 44x44px, but if I design a button as 44x44px in iPhone 4, will it shrink in size when viewed on older iPhone? I think I still don’t quite understand the retina display and how a graphical elements will be rendered in different versions of iPhone.

Don’t worry; all iPhones act as if they are 320×480px, even the Retina. You can read more about this sort of thing here.