A serious concussion, suffered playing for Kintetsu in a pre-season game in Japan last year, prompted the decision, the Marlborough Express reported.
MacDonald played 56 tests for the All Blacks after making his debut against Scotland in Dunedin in June 2000. He scored 146 points, including 15 tries, before his final test against South Africa at the same venue in July 2008.
The 32-year-old made his first class debut for Marlborough while just 16, going on to play 37 matches for Canterbury and 127 games in Super rugby, all but five with the Crusaders.
MacDonald is the third most capped All Black fullback behind Mils Muliaina (82 tests) and Christian Cullen (58).
Earlier this year, MacDonald was appointed assistant coach of Tasman. He will also manage the Nelson rugby academy.
