The man spotted the viable device as he was getting into the vehicle in Tullycarnet to take the 12-year-old to school on Friday morning.
Police said it was only the vigilance of the former officer that prevented both him and his daughter from being maimed or seriously injured.
Officers described the device as being quite similar to other devices used by dissident republicans and that this is one line of inquiry.
We are extremely fortunate no-one was killed by this deadly device.
Chief Constable Matt Baggott
Constable Ronan Kerr was killed when a bomb detonated under his car in Omagh in 2011.
Four viable letter bombs have been intercepted in recent weeks after they were posted to targets including the Chief Constable and the Secretary of State.
Matt Baggott said: "In recent weeks, my colleagues and I have talked about an upsurge in Dissident Republican activity and today's events serve as a reminder to us all of the current severe threat. I would urge everyone to remain extremely vigilant and report anything unusual or suspicious."
The discovery sparked a major security alert in the Kingsway Park area. Police and army bomb squad officers remained at the scene, where a number of homes have been evacuated.
PSNI Chief Superintendent Nigel Grimshaw said: "I can confirm the police this morning, as a result of dealing with an ongoing security incident in the Tullycarnet area, have now recovered a viable explosive device.
"That device was discovered below a car belonging to a former police officer. I am very thankful to report to you that nobody has been hurt.
"But clearly yet again we are dealing with a situation where somebody could have been killed or maimed or very seriously injured as a result of a very, very reckless act in what is a residential area with lots of people going about their normal daily business."
Northern Ireland's political leaders have condemned the incident.
It is to be regretted that there are still Neanderthals out there who believe that this is an appropriate way for them to advance.
First Minister Peter Robinson, of the DUP, said: "There are some elements of our society who have not caught the public mood that wants to move forward and see progress made.
"There are people that want to drag us back.
"Politically they will not break the progress that has been made, we will continue to work together to make a better community for the people that live here."
Sinn Féin deputy First Minister Martin McGuinness said: "The best way that we can prevent those involved in these types of activities is to make it clear to every citizen on the island who supports the peace process that they have a duty and responsibility to pass on whatever information they have."
Taioseach Enda Kenny, who was with the Stormont leaders at a political meeting in Co Armagh on Friday, also condemned those responsible.
Justice Minister David Ford said: "Those behind this murder attempt have once again shown an utter disregard for human life, not only for the life of someone who served the community but also his family and others living in the area."
The UUP's Ross Hussey MLA said: "It is clear that the current brand of physical force republicans remain determined to inflict their failed ideology on this society.
"The Police are only as good as the intelligence and information they receive and it is therefore imperative that we all unite as a community to give the PSNI every possible support as they combat this terror threat," the Policing Board member added.
Anyone with more information has been asked to contact the PSNI.