Michael told Kay he'd been back from Sicily for a year. That would have given him plenty of time to discuss his, and the Family's, future with his father. I doubt that Vito would have planned to wipe out the heads of the other Families at that point, though Michael may have seen it as inevitable. So, I think he was, at best, deluding himself (as you said) when he told Kay that the Family would be completely legitimate in five years. More likely, he was lying to her to get her to marry him.

There's a big anomaly in that scene:

It's set in 1947: the wood paneled car in the background is a '47 Ford wagon, and the limo that follows them is a '47 Cadillac. Also, Michael says, "My father is sick, very sick," an exaggeration but an indication that he was still recovering from the December '45 shooting. BUT the day when he "settles all family business" is set in 1955--again by the cars shown. That's eight years later--too many years for the Corleones to be pretending that they were "weak" and ready to be knocked over. In reality, the pact that Vito made with the other Dons at the Commission meeting only covered his agreement to protect drug trafficking in the East, and the other Dons' agreement not to interfere with Michael's return to the US. It didn't cover their encroaching on Corleone territories, as Tession bitterly complained in the fish tank scene, No way would Michael and Vito have been around eight years later (in 1955), BTW: The novel gives no date for the day when Michael settled all family business.