Bouncing the car by hand doesn't really duplicate road conditions, unless you're able to fully compress the suspension, but:

Typical interference will be at the edge of the tread/sidewall, not the sidewall itself.
1/2" has always been fine for me, but if I was rallying or road-racing the car, I'd want more.
Another way you can gain more clearance is pushing the fender away using the fender brace; usually one end is slotted.
But like I said, I usually trim that sharp corner back with some snips, touch up the edge, and go.