Some of the above strikes me as using a sledgehammer to crack a walnut. All you really need is a scrap of cast iron turned to fit the bore, a drill the size of the key you want, and a small square file. Turn the cast iron to a nice fit in the bore and loctite it in place. Face it flush with the flywheel on one side. Make a centrepop mark exactly on the joint line and drill through with a 1/8 “drill. This should be a good drill that you can trust not to wander. This is also why the plug you fitted should be the same sort of material as the flywheel.
Once you have drilled through, you have removed 78.54% of the material to make the keyway. Knock out the plug and carefully file out the rest. The half hole makes an excellent guide to keep you lined up. Use a piece of the key stock as a gauge, it is not too hard to get a very nice fit. I have done several for Stuart engines like this.
A few things to bear in mind…make the keyway in the flywheel first, it is much easier to make the one in the shaft to match if you end up a little wider than you meant to. Same goes for the key, make that last to fit both the keyways. Don’t trouble yourself too much if the fit ends up a little looser than you meant, a little loctite will cure things, and for a key it does not need to be the super retainer grade, the ordinary threadlock will suffice to keep things in place.
regards
John