Retarded is a word with several definitions, and none of them currently includes use for someone who is by modern school-test definition "severely mentally challenged." That definition has been updated, so you can regroup retarded with its old-time family of adjectives, like moronic, idiotic, etc. Retarded is a word to describe a regression in process, and more. I.E. - A chemical reaction can retard the effects of one chemical on its own, filibusters can retard the legislative process, etc. If a modern-day kid gets tested on its meaning, well those are included, so let's get with the times.
I also appreciate Thierry Phillips' comment below. Not every remark is a call to offend any party possible, and it's a tired notion when you sacrifice an open public for any sniffle you can muster. Maybe kids should not feel bad about everything and anything, but then, they won't grow up to become adults that feel bad about everything and anything, would they? Moreover, slangs are widespread. Spend your dinners with people that don't use modern day definitions of words, in preference for historical parlance, and moreover, choose to surround yourself with anyone that strives to cowardly misunderstand a context as much as possible. Censor yourself.