A bit of insider info on Paterno:
Having played for him from 2001-2004, I got to hear first-hand his comments on retirement. Following the 2003 season, he spoke at length in a team meeting about how his heart wasn't into it, and how that's what contributed to the losing season. He then went on to say that he would give 2004 a try with his full heart and effort, and if that season didn't work out, he would retire.
Obviously, he didn't stay true to that statement, as 2004 was a horrendous season, yet he didn't go anywhere. I believe he simply saw promise in the defense as well as recruiting, and decided to give it at least one more year.
My personal feeling is that he will wait to go out on a high note, whether that would be this season, or a National Championship, will remain to be seen.
As for Penn State prior to Paterno, They had some success, going 104-48 from 1950-65 under coach Rip Engle. Before him, results were scattered under a lot of different coaches, but going way back, they did win national championships in 1911 and 1912 under Bill Hollenback, although that's probably more history than you care to know...