Somewhere around 3/4" of exposed slip joint is what you should see. Not super critical for an IRS setup like yours. But normally you need at least that much to get the driveshaft in and out without taking other stuff apart. Plus it shouldn't be tight against the seal like that. Fix it right with the proper driveshaft length. I wouldn't recommend messing with the seal. Moving the engine is way more work plus has other consequences.