This is a common question. It really depends on the incoming shot. There's a general rule - if the ball is moving toward you slowly, watch it all the way into the racket. If it's moving toward you fast, you only need watch it to the point where you can no longer react to it.
Against slow balls, you should see contact. This includes serving, pushing, flipping a short ball, blocking against a slow loop, or smashing or looping against a push or other softly hit ball. (Of course, on some backhand shots actual contact is hidden by the racket.) It's also more important to see contact on more finely hit balls where you spin the ball by grazing it. You don't need to see contact as much on flatter shots, such as smashes, counter-hits, or blocks.
If the ball is coming at you fast, there's no point in watching it all the way into the racket since you can't react to it at the end anyway. So you only need to watch it until it is perhaps a few feet in front of you, depending on the speed of the ball. Against a medium-fast ball, you might watch it almost until contact.
Some players do appear to watch the ball all the way into the racket. This is probably just habit - rather than stop moving their head as they follow the ball toward their racket they simply get in the habit of following the ball all the way to contact. That's fine for some, and perhaps it helps with their timing. But there's no real need to watch the ball right until contact except against a slow-moving ball. One advantage of not watching the ball until contact is that you can look up more quickly and see what your opponent is doing, and so begin to prepare for your next shot more quickly. Some players even fool their opponent by sometimes looking up early in their stroke toward one spot on the table and then hitting it to another.
Here's a picture of Jan-Ove Waldner (considered by many the greatest player of all time) hitting a forehand where at contact he's already looking toward his opponent or where his ball is going.