I'm trying to do this as well but I'm not sure about the 3 steps above. I have disconnected my iPhone 5, turned the bluetooth on it off but what does it mean by "Select source off"? I still have yet to get my iPod Classic to connect.
Plus, if you have to turn your bluetooth off while you use the iPod, doesn't that kill your hands free phone access? Seems like they should be able to make both of these work simultaneously.