Sometimes when I reel in when the thumb bar is down something isn't engaging properly and instead of the handle spinning smoothly it feels like something is grinding on the inside of it, after awhile of reeling it like that it will engage and feel smooth again. Also I notice the grinding when I have my thumb bar engaged and holding the reel flat, but when I spin the spool and hold the reel on its side the grinding seems to go away.

Sounds like week yoke springs, or damaged spool shaft. I have seen both. I have had reels where someone has tried to service or change bearings and damaged the shaft surface around the pinion engagement pin, or bent or damaged the pin itself. I have also had reels come in that were missing one or both of their return springs, and on older reels and off brand reel's I have the seen week springs. The only other thing I would think could have happened is if it were assembled wrong, but that should have shown up right out of the box, but if you bought this reel used ,,,,,  any or all of the above could be the problem. The only time I have seen over lubing affect engagement was in extreme cold, but there is always a first??

Bingo, I did bent the spool pin, i'm assuming that's what would make that grinding noise? and would it effect how the thumb bar engages?

Yes the pinion gear is not fully engaging so any slight pressure on the spool or the thumb bar is enough to make the pinion slip. Don't use it till you get it repaired or you will cause more problems, I doubt the pinion is damaged if it just started doing it. This is why it is so important to use the proper tools for pin removal!! I highly recamend you don't listen to those that recamend altered tools to do this job!!    I am almost certain if you would have had the proper pin removal tools, this would not happen. When we service reels we don't charge that much and it is one thing in fishing that is ridiculously cheap, and when done by a reputable shop,,,,,guaranteed!

I've seen sooo many spools damaged by trying to remove that pin it aint funny. A good pro service will do as much for a reel as new bearings with nothing else. The Capt. is right on regarding the value of pro servicing. I can't think of another technical vocation that works for so little per/hr.

Ya, I'm retarded, I wasn't even trying to change the bearing - I just wanted to flush the spool bearing out and whamo I bent the spool shaft pin.

How would I know if the pinion gear was damaged btw?

I am pretty sure your pinion is ok, if there are any bur's around the engagement slot you would see them, a tech would be a good idea as you still need the pin out and a new pin in, and if there is any damage to the surface that rides inside the pinion or inside the pinion itself they would clean that up. Chalk it up as a learning experience??