The 35-year-old, who played a record 104 times for his country, joined Wasps last year and has played a major role in reviving the team's fortunes.
"I feel incredibly lucky to have played for some fantastic sides down the years and feel the time is right for me to make the transition into coaching which is what I have always wanted to do," the former Scarlets and Clermont Auvergne stand-off told his club's website.
"There is an opportunity for me to do that at London Wasps and I am very excited about the next step of my career.
"I also feel honoured to have pulled on the Wales and British and Irish Lions shirts and I appreciate everyone involved in those sides as well as the supporters who have been there and backed me throughout my playing days," added Jones.
"I am taking with me some incredible memories and experiences."
Jones, a superb goalkicker and tactician, scored 970 points in 110 Tests including six for the Lions in 2005 and 2009.
"I always thought Stephen would make an excellent coach and everything I have seen of him this season backs that up," Wasps coach Dai Young said.
"It is sad to see him retire but what we are losing on the field we are gaining off it. I have always admired Stephen's tactical nous and I think he will be an excellent member of our coaching team.
"In the meantime we have some massive games coming up and Stephen is going to play a big part as a player in the coming months," added Young.