You can never become 'too powerful'. But as your character grows stronger, there is need for a stronger set of opponents to keep things interesting. You're past the point where you need them when you can fight off a group of your 'old' adversaries taking little to no damage. I think that the game is more of a challenge if you are the underdog, but there should be times when you're allowed to simply wipe the floor with a couple of monsters.
The two main problems are that you'll run out of rules for the larger game after a while, and that it becomes harder and harder to think of a suitable background. You'll need a reason for what's happening, and the ubermonsters gathering, but you can't stick to the same friendly races either. After all, when you're close to being a god, why should you listen to a puny human telling you what to do?
As for retiring, in a way you're forced into it because monsters will start running out if you keep on developing your character way past regular levels. But I would never, ever, want to cap off a good character. Why should you force someone to stop developing? People keep on learning throughout their lives, and new monsters bring new experiences. But if you play in a fixed world, where monsters don't exceed a certain level of difficulty, you'll be slowing the character's development enourmously, in a natural way. A much better solution, in my opinion. And a powerful, nigh unstoppable force in the realms might certainly be an interesting addition to the world...
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