Joshua's reputation has declined in recent years after his stoppage loss against Andy Ruiz Jr before two more defeats came in fights with Oleksandr Usyk.
AJ was knocked out in shocking fashion by Ruiz before he was outclassed over the distance by Usyk in back-to-back fights.
Froch is concerned about his fellow Brit as "he knows he can get hurt".
"When you've made it, and you are world champion, you're pretty much financially secure. You start to almost question being a boxer," Froch told William Hill.
"I think that's Anthony Joshua's problem now. He got beat up by Andy Ruiz Jr. That's mentally scarred him.
"Now he knows he can get hurt. He knows he can get stopped. But also, AJ's got to be worth £100 million, minimum.
"If you've got what you want out of life and achieved it, why are you going to go back into the ring and get your head punched in?
"Why would you? It's a dangerous sport."
Froch went on to compare Joshua's situation to his own when he opted to call time on his career.
"You have to weigh up whether the risk is worth the reward.
"What am I fighting for? Some more money I don't need and will never spend?
"What's the risk? It could be goodbye. I think when you get to a certain level in boxing. You've made your money, and your legacy is secure.
"Like when I boxed at Wembley and chinned Groves, I had nothing else left to do.
"You're at the top of that mountain. All you can do is go down over the other side."
Joshua has made it clear that he has no intention to retire.
He feels he has a lot more to give and he is eyeing a comeback fight in the early stages of 2023.
AJ was in talks to fight Tyson Fury before the end of this year, but this unsurprisingly did not come to fruition.
Instead of facing an easy opponent next, Joshua has decided to wait for a bigger fight.
A rematch with Dillian Whyte is on the cards. He will have to beat unbeaten American Jermaine Franklin on November 26 to secure the fight with AJ, though.