Yes, Joe means a lot to this team; but, that doesn't mean she shouldn't be fired. The options you presented - allowing him to retire and be kicked upstairs - implies that those are the only two options to give him a respectable exit. That's not true.
Yes, he should be respected. Doing so would mean NOT firing him during the season. An employee can be fired with respect. Especially in football.
I like Coach Joe for sentimental reasons of being the last original Texan, but, that's about it. He should be treated like any other employee, and an honorable, respectable firing at the end of the season would be fair.