The 35-year-old, who made his final appearance for the club in Saturday's win over London Irish, has also ruled out the possibility of continuing to play on a part-time basis.
"I knew myself last week before the London Irish game that it was probably the last time I'd lead the team out at Welford Road," he told Sky Sports News.
"It really was emotional; I was choking up as I ran onto the field. Sixteen years is a long time to be doing something, especially in the sporting world. I've been lucky with the successes I've had and the guys that I've played with. I have a lot of fond memories.
"With the way my knee is at the minute I didn't have the confidence to sign on as a full-time player next year. I was contemplating playing part-time but with the way the budgets are the club, there was no just no room in the salary cap."
"The club then approached me and asked me to join the coaching staff. I thought it was the right time to go. I've been very lucky that the club have been loyal and offered me a chance to stay involved."
Murphy has scored a club record 90 tries.