Los Blancos secured their spot in the showpiece event courtesy of a 4-1 victory over Egyptian outfit Al Ahly in the competition's second semi-final on Wednesday night.
Vinicius Junior and Federico Valverde scored either side of the interval to send Real Madrid 2-0 ahead before Ali Maaloul halved the deficit with a penalty in the 65th minute.
The Spanish and European champions scored twice more in second-half stoppage time through Rodrygo and Sergio Arribas, though, to secure their spot in the final of the competition.
Real Madrid will take on Al-Hilal in the final, with the Saudi Arabian side recording a 3-2 victory over Brazilian giants Flamengo in their last-four clash on Tuesday.
Ancelotti has insisted that his team cannot afford to take their opponents lightly despite being the strong favourites to win the competition for the fifth time.
"We're up against a team that won the semi-final by playing well and deserved to be in the final. We have to respect this team. They've got good players and play well collectively. They'll be excited to play in the final and so will we," Ancelotti told reporters during his post-match press conference.
"We have to prepare well for the match, provide clear instructions to the players and devise a good game plan. We have players who can handle this type of pressure extremely well."
Ancelotti also said that he was pleased with his team's performance in their semi-final with Al Ahly.
"We controlled the match well for an hour, but then we thought it was done and it opened up. We then finished well," added the Italian on Wednesday night.
"The team's improving and we did well today because it was a match where we had everything to lose and nothing to win.
"When it was 2-0 it looked like we'd won the game and that's not the way football is. We slowed down and thought we'd won. We have to play well and remain focused until the final whistle."
Real Madrid have won the Club World Cup on four previous occasions, with their last success coming in 2018 when they beat beat Al-Ain 4-1 in the final.