If your PCs are still on version 1.6 or a mix of 1.6 and 2.0, only 2.0 has the multi-PC management feature. Since you want to install to a new PC, and will retire one PC, simply uninstall from the PC you will retire and install and activate on the new PC using the subscription LiveID. If the PC you want to remove is not working, not to worry, you are still within the terms of the license, having OneCare active on no more than 3 PCs.
In 2.0, the Circle functionality makes it easy to "de-activate" a PC that is in the Circle, but it is not a required step.
-steve