We have used Mega-Steam and MTH fluid older than that with no issues. As Jon mentioned, the puffer unit would work best with less fluid. You have engine 6-18697? This is from the manual:
Your locomotive is equipped with a smoke generator that produces safe, clean, white smoke during operation. The smoke generator requires the periodic addition of Lionel smoke fluid in order to function. Pierce the tube end with a pin, then add four to eight drops of fluid directly into the locomotive’s stack. Smoke production will commence momentarily, faster if you run your locomotive at speed. When smoke production wanes, add more fluid (four to eight drops).
It may take awhile to eliminate the excess fluid and begin smoking.