I am sure that just about everyone will give you a method for this, and I am by far no expert but here is my humble version of how I tackle the hated fuselage seam.
I follow the same basic procedure as you described above. When the fuselage is dry I take a wide strip of sand paper on a block (1 inch or so) and sand the seam down until it feels relatively smooth. I don’t worry too much about panel lines since I re-scribe any that I knock off later.
Next I run a light bead of putty, I usually use the Tamiya grey putty since it just seems smoother to me, and I mold it with my finger and let it dry.
Once that is dry I work with successively finer grit padded sanding sticks to shape the dried putty paying careful attention to (as best I can) feather the edges away from the seam. This is the part that I consider the most key to the whole process. If the putty seam only covers over the plastic joint it will hump-up slightly and may be visible under the paint. Feathering it down as best I can helps to hide the profile of the putty and blend it into the curve of the fuselage. I use the padded sticks because they usually give you a great softly rounded profile that hard surface sanders just can’t. That is also how I compensate for the slight flattening when I do the initial sanding.
Once that is done I give the thing a quick shot of primer to see how it will look with paint on it. If the results are not satisfactory I go back to work, use steel wool to remove the primer, and add another skim coat of putty working in small increments until it looks as smooth as I can get it.
When I finally get it to that near mythical perfect smoothness and profile I re-scribe the panel lines and move on to my other arch nemesis....wing roots.....
Hope that helps and I can’t wait to see what others do. Good Luck!!