You guys scare me with your unbridled use of rtv !!! Personally I wound NEVER in a million years use that crap anywhere near a fuel or oil fitting. You are just begging for trouble if the fitting ever needs to come apart. You will have bits of that crap everywhere you don't want it.
I this particular case, pipe sealant is the only type of sealant that should be used. It will stay soft and if the part ever needs to come apart the sealant can be wiped off. There is no hardened sealant bits to get anywhere it doesn't belong.
As far as how tight to do those washers ... tight enough that they won't come loose !! There is a groove cut on the back of the pickup fitting to contain the o-rings. Tighten the nuts till the pickup is tight against the pan - the o-rings aren't going anywhere !!
I'll use the pipe sealant. The rubber O-rings that come with the Milodon 21464 washer/o-ring kit are .20 (1/8 in) thick. Instruction is to put this o-ring on the inside (washer outside) and they definitely do not crush down so the the pickup seats against the pan.
I will tighten the backing washer until the rubber o-rings are .10 (1/16 in) squished. I will also use pipe sealant on the outside lock-nut threads so hopefully they won't loosen up from vibration.
Then I will fill the pan with oil to bench test for leaks...
