The Christan Democrat leader, who has been at the helm of his party for more than a decade, announced his departure at a press conference on Thursday morning.
"Eleven years as party leader takes its toll," he told reporters, adding that he would step down in the spring once his party had appointed a successor.
"There have been many great years. I have learned a lot and met many amazing people," he said.
The Christian Democrat party is the smallest party in the Swedish parliament. It is one of four parties in the Alliance – the bloc of four centre-right parties that made up the previous centre-right coalition government led by Fredrik Reinfeldt.
The party won its first seats in parliament in 1985, two decades after the party was set up. It managed just 4.6 percent of the vote in Sweden's general election in 2014, just over the four percent threshold needed for a party to enter parliament.
When Sweden's Social Democrat Prime Minister Stefan Löfven announced in early December that he was calling a snap election in March 2015, there were fears that the Christian Democrats could struggle to get enough support to remain in the Swedish Riksdag.
But the election was cancelled following a controversial deal known as the December Agreement, which allowed the Social Democrat-Green coalition government to remain in power, by following the Alliance's centre-right budget (after failing to get enough support for its own financial plan).
Göran Hägglund began his political career working with the party's youth wing in the 1970s. He took over as leader in 2004 and was Minister for Health and Social Affairs in the previous Alliance government led by Fredrik Reinfeldt.
On Thursday afternoon, the former Prime Minister praised his colleague for leading the Alliance's drive to abolish property taxes in Sweden and helping to reform dentistry and psychiatry services in the country.
"We have made the whole journey with the Alliance together. Göran has been a close confidant who with his accuracy, his composure and his wit, made our Alliance a well functioning your team," Reinfeldt said in a statement.
Married with two children, Hägglund has a strong Christian faith, in contrast to many politicians in Sweden, which is one of the most atheist countries in the world.
He is known for having a humourous tone during debates in the Swedish parliament.
When Fredrik Reinfeldt took part in his last debate in October, Hägglund talked about how the Alliance had worked to build a better Sweden, before presenting the outgoing Prime Minister with a tool belt.
"I hope you can continue with the building, wherever you end up working next," he said.
Speaking to Swedish journalists after announcing his own resignation, Hägglund he said he didn't have "the faintest idea" what he would do next in his career, noting that he first hoped to read some books and listen to more music.
Sweden's next general election is now scheduled to take place in 2018.