After months of speculation around his future, Khawaja fronted a press conference in Sydney on Friday morning to confirm he would pull up stumps next week.
The 39-year-old revealed he offered to retire during the previous summer but Australia coach Andrew McDonald urged him to keep playing.
Khawaja expressed frustration at former players and the media for "attacking" him in recent years and ushering him towards retirement.
"It felt like attacking. It was disappointing," Khawaja told reporters.
"Saying I was selfish for staying on. But I wasn't staying on for myself.
"I guess moving into this series, I had an inkling this would be the last series.
"I'm glad I can go out on my own terms."
Khawaja thanked his family and mentor Bill Anderson, adding he hoped to have inspired youngsters around the country.
"You can do whatever you want. You've just got to keep trying," he said.
"'I'm a proud Muslim coloured boy from Pakistan who was told that he would never play for the Australian cricket team. Look at me now. And you can do the same."
The left-hander's decision means he will finish with 88 Tests to his name, having already risen to be Australia's 15th greatest run-scorer in history with 6,206.
The call to walk away means the Sydney Test will also turn into something of a farewell party for the 39-year-old, with the series decided and Australia 3-1 up.
Khawaja's Sydney exit is fitting, given so much of his career has been based around the city he moved to as a four-year-old from Islamabad.
He made his debut at the SCG in 2011 against England, scoring a stylish 37 that offered Australian fans hope at the end of the worst home summer this century.
Khawaja's first Ashes century came at the ground as well with a 171 against England in 2018 as Australia wrapped up a dominant 4-0 series victory.
And it was at the SCG where he revived his career as a 35-year-old, scoring twin centuries against England when Travis Head missed a Test in 2022 through COVID.
That Test prompted one of the great late-career revivals, hitting seven centuries in his first two years back in the side as part of a dominant opening partnership with childhood friend David Warner.
Khawaja's resurgence also made him a genuine all-time great in the Australian side, with 16 centuries and an average of 43.39.
He will also become Australia's oldest Test player in 40 years at the SCG over the next week.
Khawaja's position had come under more scrutiny this summer after being unable to open in the first Ashes Test in Perth due to back spasms and then missing the Brisbane Test with the injury.
He was then initially left out in Adelaide before Steve Smith's vertigo allowed him to return, before an 82 in the first innings ensured the left-hander would stay in the side for the fourth Test in Melbourne.
Khawaja's exit makes him just the second player after his good friend David Warner to retire while still in the Test team in the past decade, as Australia face a period of transition over coming years.
USMAN KHAWAJA'S TEST CAREER:
Tests: 87
Runs: 6206
Average: 43.39
Centuries: 16
Half-centuries: 28
18°C