He said he wanted to return to "where it all started" for him and First Lady Michelle Obama, instead of delivering the speech from the White House.
The country's first black president, now 55, was first elected in 2008 on a progressive message of hope and change.
His successor, President-elect Donald Trump, has vowed to undo some of Mr Obama's signature policy achievements.
Mr Trump will be sworn into office on 20 January.
Returning to Chicago, where he first declared victory in 2008, Mr Obama will deliver a parting message to Americans after a divisive and vicious election campaign which led to Mr Trump's victory over Democrat Hillary Clinton.
The speech will aim to speak to everyone in America, including Trump supporters, White House officials said.
His trip to Chicago is his last as president, and his 445th journey aboard Air Force One.
"We've made America a better, stronger place for the generations that will follow," he wrote in a Facebook post previewing the speech.
"We've run our leg in a long relay of progress, knowing that our work will always be unfinished.
"And we've reaffirmed the belief that we can make a difference with our own hands, in our own time.''
Mr Obama said he would look back to his early years, when he worked as a community organiser in the city.
More than 20,000 people had been expected to attend the farewell address at McCormick Place, the largest convention centre in North America and the venue for Mr Obama's speech after he defeated Mitt Romney in the 2012 election.
The tickets were given out free, but were selling online for more than $1,000 (£820) each hours ahead of the speech.
First Lady Michelle Obama, Vice President Joe Biden and his wife Jill Biden are all in attendance.
Mr Obama was also expected to try and rally the spirits of beleaguered Democrats, still reeling from Hillary Clinton's election loss in November.
"It's not going to be like an anti-Trump speech, it's not going to be a red meat, rabble-rousing thing, it will be statesman-like but it will also be true to him," lead speechwriter Cody Keenan told the AFP news agency
"It will tell a story."
Democrat supporters gathering in Chicago told the BBC they were looking to Mr Obama to provide some hope and guidance for them.
"I know that he will squash some of the fear that America has about the President-elect Trump," Aretha Glasper said. "I know that he's gracious enough to offer his help going forward."
The speech has gone through various drafts since Mr Keenan first began penning it last month as Mr Obama spent the Christmas holiday in Hawaii. Speechwriters have looked to back to significant speeches by the president for inspiration, including his 2004 address at the Democratic National Convention.
Presidential farewell addresses have long been an American political tradition.
Former Presidents George W Bush and Bill Clinton delivered theirs from the White House, while George Bush Senior gave his at the West Point military academy.
President Obama leaves is viewed favourably by 57% of Americans, according to an Associated Press-NORC Center for Public Affairs Research poll, a similar level to Bill Clinton when he left office.