If you're going to watch the SpectroMagic Parade followed by the Fantasy in the Sky fireworks, you should stake out a place about an hour ahead of time. We like to find a good place, then have half the family stay there while the other half goes to pick up some burgers. You'll have had plenty of time to eat and clean up while waiting for the parade.
You may have some rude people try to squeeze between you and the ropes at the last minute, so be prepared to be polite but assertive with your spot: "Excuse me, but we've been waiting here for some time so our children will have a good view of the parade -- I believe you might find a spot for yourself over there closer to the bridge." A beach towel is a good way to "stake your turf". I'm not suggesting that you try to take more than your share of space, but I've seen too many oh-my-kid-can-squeeze-in-front-of-your-kid types, and it pays to think ahead.
Fantasmic is wonderful! I wouldn't recommend the restaurant package myself -- the places are all fairly expensive eateries that don't really interest my family, and the viewing spot isn't all that great. I suggest that you go early to get a seat; bring along some fast food and eat while you wait. The seating area is so large that they have signs warning you not to be separated from your party -- this is good advice. Warning: This show features some villains, and your children might be frightened; still, it is BY FAR the best fireworks show at Disney. They spray a huge "screen" of water into the air and show clips of movies. They have live characters, lazers, fireworks. It's a great show.
Illuminations is, in my opinion, the last on the list. It doesn't have the "wow" of Fantasmic's special effects, and it lacks a plot. On the other hand, it is easier to get a good viewing position because the lake over which it is displayed is so large.
One other piece of advice, which applies to any evening fireworks shows: Expect to spend at least an hour exiting the park (Magic Kingdom is the worst in this respect -- depending upon where you are, you could spend two hours exiting the park). You will be in a huge crowd, and you should exercise some care not to be separated from your children.