This is what Ancelotti has been doing for a long time, Luka Modric no longer has a regular place, he only plays in important matches and Ancelotti has said that Luka Modric is really needed in the team to guide the young players in the Real Madrid squad.
Real Madrid's decision to extend Luka Modric's contract is quite right in my opinion, despite his age being 38 years old, Luka Modric's quality is still quite good and it was clear that last season Luka Modric still contributed greatly to the Real Madrid team when they won the CL title and La Liga.
As we talked about before, the presence of Luka Modric in crucial matches provides color because he can provide something different when the team needs to win. Ancelotti still needs Luka Modric as a senior player and his role when playing is also very important as one of the rhythm regulators of the game.
One season is still possible for Luka Modric to play well, but I am sure he will not play regularly again like in previous seasons because the coach will definitely look for the right format before he leaves or retires next season.