Watson played his first competitive match in over eighteen months – and his first without being captain of the club since 2009 – when he and several of the other Essendon players who served bans in 2016 made their return to the field against Collingwood in the 2017 pre-season. Watson then made a successful return to football with a dominant game against Hawthorn in a 25-point win. On 9 August 2017, with three rounds left in the home-and-away season, Watson announced that he would retire at the end of the season. Watson then played in three of Essendon's last four matches, with his final game coming in the 65-point elimination final loss to Sydney at the Sydney Cricket Ground. Watson played 20 games in his final season, which is the most he had played in a season since 2012, to finish on 220 games for Essendon.
As Watson had won the 2012 Brownlow Medal, during the season that the supplements program took place, the AFL Commission reviewed the award. Watson was retrospectively ruled ineligible for the award by the Commission, and the medal then awarded to the next-highest vote-getters, Richmond's Trent Cotchin and then-Hawthorn player Sam Mitchell (who had just been traded to the West Coast Eagles at the time), under the normal rules regarding ineligible players in Brownlow Medal counts. Watson had pre-empted the decision by announcing on 11 November 2016 that he would hand back the medal.
While serving his suspension in 2016, Watson worked at Hole in the Wall, a coffee shop in New York City. During his retirement speech, Watson said that he had several United States-based business interests, including two café-style venues, a gym and a buyers' advocacy business, that he wanted to focus on upon retiring.
Watson met Dutch model Virginia Slaghekke, who was represented by Donald Trump's Trump Model Management, at Hole in the Wall in New York City while he was working there during his suspension in 2016, and they began dating in August 2016. Slaghekke, a neuroscience/pre-medical student at the time, later moved to Melbourne on a student exchange program to support Watson during his final AFL season. They have two children together.