Re: 1961 lark III 40hp evinrude
The coils must be flush with the bosses. You can see the illustration in your manual.
The points should be set at .020", not .20. Turn the flywheel until the cam for the points is at it's highest point, then set the points, using a feeler guage, which should slide through the points with a slight pull. Before replacing the flywheel, put a piece of clean heavy paper between the point contacts and pull it out with the points closed to clean off any oil that may be on there. You do not want to have to pull the flywheel to clean the points again.
You can hold the flywheel with an automotive flywheel holder. They're available at any auto parts store. Use care when doing this. If you can get a helper, do so. If not, make sure the flywheel holder is fully engaged with the teeth on the flywheel gear.
Another method is to take a piece of 3/16" thick flat bar stock (any hardware store) about 18-24" long, and drill it to match the mounting holes for the recoil starter assembly. Wrap the long end with duct tape or something, then bolt it to the flywheel with 1/4" cap screws, 1/2-5/8" long. That will give you a solid handle to hold the flywheel while you use the torque wrench.