@CA John, here's a very recent project of mine...
This was previously the all red Rock Island docksider. You might want to use some very fine sandpaper with some isopropyl alcohol to remove the number from the cab, but I don't think that number will show though once you get to a couple coatings of new paint. The "Lionel Lines" wording on the tender would be another story, since it could be heat stamped: Just use some very fine sandpaper to keep the scratching to a bare minimum. Or as you mentioned, re-decal right on top of where the old lettering was.
The main thing before you start painting is to get the shells clean. Use some warm water with dish soap. You may want to use a tooth brush or a small scrubbing brush to get into all the details of the engine body.
I decided to do a partial red body since the wheels were already red, I only wish I had sanded down the pipe detail where the decal lettering was going to go. You can see the "H" in Lehigh is over some of the cast in pipe detail. I would have rather had that lettering sit flat. Sanding down the detail there wouldn't have bothered me as much as having the lettering sitting over it as it does. But at the time, I didn't realize how I was going to decal the engine.
I hand brushed the coal load in the back of the cab, and installed a working headlight. The engine is still DC only - but I have the option of running my layout on either AC or DC. I packed the inside of the shell and chassis with added weights, so this little critter will pull some trains cars.
It's funny how many people consider these inexpensive plastic Lionel engines to be "throw aways." But this engine uses the same basic DC motor used by Lionel in many locomotives. I consider many of the newer made engines to be far more of a throw away product. Sure they have more features with the remote control, sound, etc. But the technology changes so fast, that it becomes obsolete in no time at all. And then you can't get the parts needed... if you ever could at all. And if you can't get parts you can't fix it.
Any ways, good luck with your project.
