Replacing old shower stem cartridge. Grout? Caulk?

First a disclaimer -- I'm not a plumber and have very little experience with this.

I've got a 1960's era American Standard shower with two faucets (hot & cold). Showerhead was dripping so I removed the cold water escutcheon and found the stem embedded in a thick layer of grout of some sort, seen in the picture, presumably for waterproofing. I chiseled it away with a screwdriver and hammer (lots of dust) over an hour and the final result can be seen in the next picture.

I got a new shower stem that is installed and works (no more dripping!), but I don't know if I need to basically make it the way it was before in terms of sealing it. The cement/grout that was in there before went as far deep as the bonnet, and was at least an inch thick fully circumferential.

-Do I need to go this deep again as it was before?
-What material? Casual recommendations have included 100% silicon caulk, plumber's putty.
-As big of a PITA it was, I knew I could get whatever grout it was out with a chisel. With the recommended material, how easy/hard is it to remove again if needed, and how would I remove it?
-Do I just need a thin layer around the more superficial part even with the tile to protect water coming in?
-Do I leave an inferior segment ~25% un-sealed to allow moisture out?
-Some water got into the grout when the cartridge was being switched out. Should I be very concerned about drying this up before sealing?
-If I have to seal it as deeply as before, am I protecting against leaks from within the valve? Is this necessary?

Thanks very much.

I would just use caulk on the escutcheon, and leave the hole as it is. Only seal the top and sides though, so any water that collects inside the escutcheon will easily drain out.