His career isn't over yet. Unlike Favre, it was never an issue of Peyton not knowing if he wanted to retire or not. He always felt like he would be able to return after the surgeries, and he has been working hard the entire time to rehab so that he could return.
What it ultimately boiled down to was a very unique set of circumstances in which this is the best move for both Manning and the Colts. Sure, Manning is one of the best QB's of all time, but nobody really suspected going into last year that the Colts would go 1-15 and end up with the first pick in the draft. This year's top prospect, Andrew Luck, is considered by many to be one of the best QB prospects of the last 20 or 30 years. Not to mention, Robert Griffin III has also exploded into the number 2 spot after his Heisman winning year with Baylor. So, just like 14 years ago when Jim Irsay had to choose between Peyton Manning and Ryan Leaf (the biggest bust in NFL history)
, he is faced with the same choice.
Sure, they could have kept Peyton, gave him the 28 million dollar bonus, and then traded the top pick, but that's not smart for the long term of the Colts. Peyton Manning is 36 years old, and coming off missing an entire season of football. Yes he is one of the best ever, and I do believe that he will be able to play great even after the long layoff, but the Colts team only managed to win ONE game last season. That means there are a LOT of problems that need to be fixed, and they probably wont all be fixed in the last 2 or 3 years of Peyton's career. For the Colts, they look at it just like they did when they drafted Peyton 14 years ago. They take Andrew Luck now, and in a few years they will be right back in the mix of contending for a Super Bowl. Now, that's not to say it's exactly how it will work out...but that's the logic.
For Peyton, he gets to basically have his choice of where he wants to finish his career, and can go to a team that is more likely to have the right pieces in place to win right away so that he can try to get another ring, or at least finish out his career respectably.