Ancelotti might retire when he gets a few more trophies with Madrid. A big club like Madrid with good players will not choose a young coach carelessly. Those big players have different egos. Only a coach with great achievements might be able to suppress the ego of each player to play well on the field.
Regarding the many great players in the Real Madrid squad, I think it is a challenge for Ancelotti to bridge them so they can become a great force on the field. It's difficult and it's definitely difficult, but when he controls the dressing room, then everything is under control.
Speculation about what Ancelotti wants to do and when will go on until he announces his final plan. But he gave an interview in France and said:
“Before my retirement, I want to win the new Champions League, I am a coach who always wants to reach the top” Ancelotti said to Spanish out LEquipe."
To me this sounds like he is leaving a backdoor open for any possible decision. If he doesn't win it this year and next year and his contract is about to expire, then he could point towards that interview and say that he is not done yet. But he said that he will definitely end his career in Madrid.
But I think there are scenarios in which even Ancelotti doesn't know when his career ends. Imagine he wants to end his career in 2026 and the Italian national team knocks on his door and asks him whether he wants to become the Italian national coach. As far as I can see, he has never been the head coach of a national team, which I think would still be a dream for him if the right opportunity shows up at the right time.