http://blog.scoutingmagazine.org/2014/09/08/retiring-worn-out-american-flags/
This web site tell how to retire an old flag.
Option 2: Burn the flag to retire it
A popular way to retire a worn-out American Flag is by burning it. Page 76 of the BSA Handbook says, “A national flag that is worn beyond repair may be burned in a fire. The ceremony should be conducted with dignity and respect and the flag burned completely to ashes.”
PRO: Method preferred by U.S. Flag Code and BSA Handbook. Usually the most ceremonial and solemn method.
CON: Worst option for the environment and your Scouts’ health. Unlike the cotton and wool flags made in the early 20th century, today’s flags are made out of petroleum-based materials like nylon. Burning nylon is different from burning cotton or wool and can create hazardous gas.
