Once you have created your project with manifest in VS Code, Authorized your org in Visual studio code and set it as the default org, then if you have problems when trying to retrieve source files to local by right clicking and using the Retrieve source in manifest from org command, try using the CLI command in the terminal:

sfdx force:source:retrieve -u DefaultOrgAlias --manifest C:\Users\path\to\localproject\manifest\package.xml

This should work.