Thanks Mac. Makes sense. The only other thing that worries me a little is even backing off the castle nut, the wheels, although they still spin, and they turn smoothly with no noise, seem a little stiff compared to before I took everything apart. I used the same bearings and the rear grease seal isn't too small, so that shouldn't be the issue. Maybe it's just from new grease? Probably not using Bear Buddies on this one.
Before you took things apart, the bearings were loose, and the grease was old.
There was less grease in the actual bearing, and it was thinner (less viscous) from its age.
So yes, the wheel would spin slightly easier before the repacking.
Spin the wheel when tightening the castle nut after repacking to properly "set" the bearings.
Then spin the wheel assembly good. Do it a few times.
Then try and tighten the castle nut more.
Spin things again.
Should be spinning free now, but with a little resistance as you noticed.
Then back the castle nut off until you can get your cotter pin in.
Spin the wheel assembly as it will get smoother to spin, but you don't want any looseness in the bearing if you took the bottom and top of the wheel assy and tried to rock things up and down.
BTW, you should never have to back off more than 1/8 turn.