Grinding first gear was a common problem back in the 50's. You should have a little more separation than 1/8" Grinding the gears isn't particularly good for them, but if you pull it almost into 1st gear and give the driven gear a little time to slow down, that usually helps. Using 2nd to stop the gears wears the 2nd gear synchro, and the synchro assembly is getting very difficult to find and expensive. We used to put new synchro rings in the synchro unit, but I don't think anyone makes the synchro rings any more.
Did you have your flywheel machined before you installed it? Wear on the flywheel will cause a clutch that wasn't worn in with it to drag.
