The 39-year-old top-order batter will go into his final Test with 87 caps having scored 6206 runs at an average of more than 43, that includes 16 centuries.
Speaking to reporters with his family in attendance, Khawaja said: "I've been thinking about it, not wholly, but for a while. Moving into this series, I kind of had an inkling in my head that this would be the last series.
"I talked to Rachel (Khawaja's wife) about it a fair bit, and I knew this was a big chance.
"I didn't leave the door fully shut, because I knew there was a chance I could play on. I know (coach) Andrew McDonald, even right till the very end, when I told him a few days ago, he was still thinking about how I could get to India (in 2027).
"I'm glad I get to leave on my own terms, with a little bit of dignity, and go out at the SCG where I love.
"But I think the start of the series was a pretty tough time. Then going into Adelaide and not being picked initially for the game, that was probably a sign for me to say, 'all right, it's time to move on'."
Khawaja revealed he had considered retirement at several stages in the last two years, saying that he had spoken to McDonald about finishing around the Boxing Day Test against India in the last Australian summer.
"I said to him, if, at any stage right now, if you want me to retire, I will retire straight away. I have no issue. I'm not hanging on for myself," Khawaja said.
"That was the most annoying thing, because I felt people were coming at me, and I felt they were saying I was selfish for staying on. But I wasn't staying on for myself.
"Andrew McDonald practically said, no, I want you to stay. We need you for Sri Lanka and the World Test Championship. I want you to stay on. And so I did."
Khawaja confirmed he would continue to play in the T20 Big Bash League for Brisbane Heat after his international retirement and is still hoping to play for Queesland.
Australia stand-in captain Steve Smith has paid a glowing tribute Usman Khawaja, who will play his final Test against England when the Ashes concludes in Sydney on Sunday.
Usman Khawaja is expected to make a public announcement regarding his Test future ahead of the fifth and final Ashes Test against England, scheduled to be played in Sydney.
Former Australia batter Damien Martyn is currently in an induced coma after being hospitalized in Queensland on Boxing Day with meningitis.
The International Cricket Council has rated the pitch used for the Boxing Day Ashes Test at the Melbourne Cricket Ground as "unsatisfactory", issuing the venue with one demerit point.
