My son is almost 8 and told me many years ago that he knew the Easter Bunny wasn't real and the Santa wasn't at the mall and characters were people in costumes (strangely enough he is still freaked out by the tooth fairy though).
Anyway, we still have just as much fun at WDW. I tried princesses once with him and he was TERRIFIED of them - have since learned he's afraid of all the face characters. He still loves the big stuffy ones though and we've never NOT experienced the Disney magic. We don't do as many meet and greets as we used to, usually stick to character meals unless we're in the right place at the right time, but he still gives them BIG hugs (Chip and Dale are his favorites).
I'm an adult, I know that there are "friends of the characters" inside a big costume, but that doesn't mean I still don't like to hug Mickey each time I see him!!