In a high level campaign I ran, I took the design philosophy that the villains were supernatural (e.g, dragon or lich), the average npc was weak (level 3 or less), and the characters were once-in-a-1000-years heros (level 10-20).
Every now and then they would have an obstacle involving regular humanoids or the local government and they had the option of just steamrolling everything (even whole platoons). It provided a great contrast to the magic-boss death matches and let the characters really feel special.
It also drove home that they were the only ones who could save the day.
I joined a running campaign (still at the low levels) set in a magic library and I had a character with a comically egregious case of that kind of back story. The campaign had a tight foundation with everyone else already knowing each other and being there for a reason.
It wasn't easy to recon me in, so we didn't and I worked this out with the DM. I just had all these things I'd reference. Grand, level-inapproriate adventures, offering impossible feats as part of insane plans, being a key figure in historical events that the others were quite sure had never happened, etc. But absolutely no other sign of insanity or chronic lying in my serious, good-aligned, heroic character.
The DM let everyone have fun scratching their heads over it for a few sessions before they stumbled on my character's series and found out he was just a fictional hero spawned by the library to assist their quest. His level was from the creation magic and had nothing to do with his real-only-to-him backstory.
It worked out in that very very specific setting.