He'd be crazy not to retire at this point. There's nowhere to go but down, even for a guy who hasn't hoisted a trophy in seven years. Tony's staying in St. Louis, so a return to the Cardinals isn't in the works either.
I personally think he should have walked away when Steinbrenner threatened his job last year...and the year before, but that's just me. Better late than never, at least. Joe certainly deserves better than the way he's been treated in the last few years.
More significantly, this puts a nail in the coffin of the Yankees as we know them. I don't think Rivera's coming back if Torre isn't in the dugout.
And more and more evidence builds up for my Curse of Giambi theory. Since he joined the team they haven't won a world series. (Though arguably there are other rationales for this, but I am sticking to my theory.)