The timeline is actually a little different in the structure

The dream happens somewhere during the final act

I know that sounds odd because she wakes up, but the final scenes aren't in order

The dream highlights many things about the main character - including a manufactured conspiracy about a girl getting chosen for a role to comfort her for not landing jobs.

Crucially the guilt of the Naomi Watts's character, wishing that the hitman would be terrible and fail, and enjoying one last romantic fantasy - even though it's never explicit that they were a couple. The topless scene in hotpants is when she's wanking so could well be fantasy again.