We are leaving Interlaken and stopping in Lucerne for the day probably about 12 hours. Then I was thinking of taking the overnight train to Hallstatt Austria and spending 1 night there before heading to Munich. Does that sound reasonable or is it too much? Anyother suggestions? Hallstatt just looks so beautiful!!
Hallstadt (as popular as that destination is for Americans) is a bit out of the way, since it is east of Salzburg and requires getting on a local train to end across the lake from Hallstadt.
There are better options: Lindau is nice and quiet, but for nature lovers the island of Mainau with its huge park-like setting is a draw. It's on the western edge of Constance. Check train lines; there definitely is a good one from Lindau to Munich.
If you aren't tired of mountain scenery, I'd go into Tirol: train connections via Innsbruck, Kufstein and then up to Rosenheim and then Munich. The capital of Tirol, Innsbruck, has its own charms. If possible, visit the Svarovski factory in Wattens (20 mi. east); it's a very unusual artistic experience.
Alternatively, visit Füssen and the Neuschwanstein area. Stay overnight on the Austrian side (Reutte) which has better lodging.
My favorite places in that area are mostly off-train routes. Sometimes it's worth renting a car.
Stopping in Halstatt is a little bit roundabout way of going to Munich. You might think about going via the Allgäu (SW part of Bavaria, www.oberstdorf.de), or stop at Pfronten (www.pfronten.de) or Reutte (www.reutte.at), then through the Austrian Tirol and Garmisch-Partenkirchen to Munich.
Another option, if you want a place with a gorgeous view (devoid of American tourists), try Lindau.