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"It is with great regret that I am withdrawing from the inaugural ATP Cup event," Federer said in a statement.
"When I entered the event last month, it was a really difficult decision because it meant less time at home with the family and a fully intense start to the season.
"After much discussion with both my family and my team about the year ahead, I have decided that the extra two weeks at home will be beneficial for both my family and my tennis."
The world number three, 38 years old, withdrew on Monday from this week's Masters 1000 tournament in Paris, two hours before the start also saying he needed to rest.
The ATP Cup organisers tweeted: "@rogerfederer announced that he would not play the #ATPCup for family reasons and therefore Switzerland was removed" from the competition.
The ATP Cup is a new competition which competes with the revamped Davis Cup and will be held in Brisbane, Perth and Sydney from January 3-12.
"It pains me to not be a part of the most exciting new event on the calendar," Federer said.
"But this is the right thing to do if I want to continue to play for a longer period of time on the ATP Tour."
"For my Australian fans, I look forward to seeing you all at the Australian Open, fresh and ready to go."
The Davis Cup will be held November 18-24 in Madrid but Switzerland did not qualify.
Federer will next play at the ATP Tour Finals in London, which get underway on November 10.
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