I would say, you have the general idea down. But I think there are a couple important parts that are missing in your overview. (This depends on if there are other "sentence methods" out there besides what is written about on alljapaneseallthetime.com which is what I'm basing my reply on here.)
One of the keys is that your sentences aren't sought out by you, but that they appear in the written and spoken material that you are encountering daily. Put another way (with the emphasis better placed), you are reading and listening to Japanese every day as much as you can, and when an interesting/unknown/difficult phrase/word/grammar point/jukugo/etc. appears, you add the sentence in which it is found to your SRS.
One underlying principle that I think is important to understand is why do this with these sentences rather than just continue reading/listening to Japanese. The method draws from research about second language acquisition that shows that acquisition occurs when you are exposed to language that you can and do understand. Since you are not likely to understand (easily) everything in the language that you are reading and listening to in the "real world", you are isolating grammar/vocab rich chunks of the language (that you look up and study in order to understand) so that you can be exposed to them over and over (through an SRS). By building a large library of chunks, you are reducing the likelihood of accidently memorizing the chunks. By reviewing the chunks daily (in place of time spent listening/reading to real natural Japanese, in the form of manga, radio, TV, etc.) you are increasing your chances of exposure to Japanese that you will understand, thereby increasing the amount of time spent with Japanese that will increase your acquisition.
So I would revise your step by step overview:
1. Read and listen to Japanese as much as you can every day.
2. When you encounter something interesting, something you didn't understand but want to, etc. you add it and its sentence to your SRS. (You can put a goal of 10 per day if you want, but you shouldn't feel limited by it. In other words, add more if you find more, add less if you don't find many good ones.)
3. Study these in your SRS. Let the SRS and your daily exposure to Japanese (from #1) do their tricks.
4. Repeat steps 1-3 forever. (Or until you are able to approach any Japanese material without constant recourse to a dictionary or grammar book. When you can do this, as long as you are still reading/listening to Japanese daily, you won't need to continue with the SRS. You simply enjoy things in Japanese, use context clues when you don't understand, or use a dictionary/grammar guide when context clues fail you. Just like you do in your native language when you come across stuff you don't understand.)
If you ever have to reduce your time spent studying, you should always continue your SRS reviews and spend whatever remaining time there is on listening/reading Japanese.
Your questions.
1. Ideal sentences vary according to the person. As you start working, you'll find your own rhythm, rhyme and reason. Do what feels right and works for you. General tendencies are:
-Use sentences that contain one or two parts that are difficult/unknown to you. (This means one or two words OR grammar points OR expressions OR kanji. One or two of each of those is way too much unknown stuff for the sentence to really be helpful. The sentences you choose should be almost comprehensible to you with the exception of the one or two bits.)
-Avoid super long sentences and single word utterances. (Short sentences often lack the context needed to understand and acquire anything of worth. Long sentences have lots of context, but are overwhelming for a flashcard style of learning. Also, they are likely to include too much stuff that is difficult for you.)
-Use sentences that are interesting even after they are removed from the source material. (Make sure the word/grammar is interesting to you or that the content of the sentence is interesting. This helps make the review process a bit more enjoyable than if you only used sentences from grammar/textbooks.)
-Don't worry too much about this. You can add it now and easily delete it later.
2. If you feel your Japanese grammar/vocab is intermediate/advanced, then I echo others' advice. Focus on finishing RtK before getting into sentences. At 500, your knowledge of kanji is not quite good enough to get into reading too much. When you get to around 1500 or so, you can start getting into reading and not feel too bogged down by unknown kanji. Starting around 1500 also might spur you on to finish since you will feel so good about all the kanji you can recognize, you'll want to finish the book so you can recognize all of them. The sentence method is really about acquiring the whole language as it is. It will help with learning the kanji readings and how kanji are used, but only if you know how to recognize them. Otherwise, the sentence method won't really work. Unless you are using only kana based sentences. Or if you are using sentences that only have one new kanji word per sentence, thus allowing you to acquire that new kanji. This isn't really advisable. You should get the kanji done, then start sentences.
3. Don't worry so much about the grading either. After a while you'll get a feel for it. Maybe try people's advice on timing yourself at first.
You might ask why emphasize step one instead of just using an SRS with sentences. Being exposed to isolated sentences definitely increases your acquisition over being exposed to a list of vocabulary or a list of grammatical structures. But it still can't include all the context that comes in natural use of the language. If you are reading an actual book or manga, you will be exposed to how authors refer to characters, events, etc. that occurred in the near past, distant past, extreme distant past. You will better see how nouns, pronouns, and antecedents work. You will get an idea of how tenses are used throughout a discourse. (This is very different from English. The past and present get mixed in a way that still baffles me, but I'm started to get a feel for desu being used to mean was.) It's hard to explain, but there are aspects of language that cannot be isolated in a single sentence. For these, you need to have exposure to the language as it is used in real life. This is one reason why step one is key to the sentence method.
To be honest, I didn't really stick with using SRS with sentences. But I stuck with step 1 above and that has been working pretty well for me. I do wonder though if they would have helped me progress even faster. It's on my to-do list to get back to doing sentences. Someday.
Good luck!
Has been working out for me so far.
But because of the way RTK is arranged, some common Kanji are learned at the very end of the book. So you 
