Error removing physical disk marked as Retired

I believe I've seen this once with a customer, and it seemed to just be a Storage Spaces bug. Rather than going to Microsoft for support on the issue though, they opted to just backup/restore the data and recreate the storage space and virtual disk.

This is not normal behavior though - replacing the physical disk should allow you to "replace" and "repair" with no issue. I'd recommend contacting Microsoft to report the bug / erroneous behavior if that's an option for you, otherwise you may be stuck recreating and restoring.

Still, as others have mentioned, you should definitely try a reboot. I'd also recommend testing with an additional replacement disk. Iulian's PowerShell command suggestions are worth a try too, but those did not work for me when running into this issue.