The 35-year-old Smith scored only 41 goals during his career, but made his presence felt in other ways.
"Whether we ever got anything out of him offensively or not didn't matter," Senators general manager Brian Murray said at a news conference. "What I liked about Jason was his leadership and the grit he provided around the net."
In 1,008 career games with New Jersey, Toronto, Edmonton, Philadelphia and Ottawa, Smith had 169 points with 1,099 penalty minutes. He also appeared in 68 playoff games, recording 11 points.
An Oilers captain for five seasons, the Senators brought Smith in last year to offer leadership and mentor some of Ottawa's young defensemen.
He wasn't able to finish the season due to injury, and recorded just one goal in 63 games.
Smith said he spent a long time thinking about his future.
"This summer, as I was training and working out, I just didn't feel it," he said. "It's just time to take on something new. I thought about it quite a while. It's not like I flipped a coin and made a decision. It's time to move on."
The Calgary native said he's looking forward to spending time with his wife and two daughters and hopes to have a role in the game in the future.
"The game's treated me very well and I want to give back as much as I can," he said.
Smith's decision will help the Senators as his $2.6 million salary won't count against the salary cap. This leaves Murray with a little breathing room. Ottawa had been about $1.3 million over the cap.