If you have friction shifting now, I'd go ahead and get a 8 speed HG50 cassette with a suitable gear range, like 13-26. you'll undoubtably need to readjust your rear derailleur a bit if you're going from old school 7 freewheel to 7 speed on a 8/9/10 freehub anyways.

if you do have index shifting, well, stick with 7 + the spacer, but yeah, you'll likely need to completely readjust the rear shifting as the new sprocket will likely be about 1/2 cog farther to the right. your old wheel is probably 126mm nut-to-nut, and the new one will undoubtedly be 130mm. a 4mm spread is trivial on a steel frame.

also, with the 7-speed on the freehub, your chain line might be just a hair too 'in' ... this just means when you're in the small front chain ring, you'll find it will be more likely to scrape the back of the big chain ring when you use the smaller half of the rear cassette. simple solution is, just don't do that. shift to the big ring in front before you get down to the taller/smaller 3-4 cogs in back, and everything will be much happier.