I'd say find a way to ditch the separate OS + games drive to make things simpler and more flexible. I'm not sure which brand or whatnot you're going for, but as an example, taking the Samsung 970, a 2TB drive will be $30 more than a 500GB + 1TB setup.
Hard disagree. Boot drive gets Windows ONLY. Games / data all go on AT LEAST one separate drive. Makes it MUCH easier to wipe and reload Windows if you need to, or to upgrade the size of the other drives, or to transfer them to a new build, etc.
OP, your plan is a good one. Though I would echo the suggestion to go with a bigger games drive, unless you are TRULY the sorta person who plays just a few games at a time and is then fine with deleting them afterwards. Personally, my games take up over 3 TB on my gaming system. I clearly don't live that way.
I'd step down to a Gen 3 m.2 if it meant being able to fit a 2TB instead of a 1TB into my budget. You're not realistically going to notice the speed difference between the generations, but you will notice the speed decrease if you fill that drive up. Plus, you'll notice when you run out of room.