When I was an 8-year old boy in the 1950s, it was not unusual for kids my age to say, "You RE-tard!" "That's so GAY!" " What are you, queer or something?" Or, also as a criticism from one boy to another, "You WOMAN!"
In those days, all of those criticisms were commonly used, and they reflected, in general, the common views of the society around us.
As I got older and became more socially aware (NOT politically correct, but socially aware of how words affect others), I learned not to accept those comments as "normal." I learned that they were mindless slights of others. They were offensive to others. They promoted social values that I came to reject, as did our society as a whole as the years went by.
As you can see for yourself, the expressions that were "normal" in my boyhood reflected a lack of respect for others. They were in direct conflict with my adult values as I matured, so I stopped using them.
The use of the word "retarded" has little or no negative connotation for your friend because, I'm guessing, she does not have family members who are mentally challenged (or who are clinically retarded). I'm guessing none of her friends have family members who have such challenges. I'm guessing that she and her friends do not have interactions with those who face mental, physical, and/or emotional challenges, and therefore, using terms that are offensive to that "group" of people carries no sense of "hey, this is not right" about them.
Watching old TV shows can be really educational in this regard. I grew up with westerns like The Lone Ranger, The Cisco Kid, and others. In The Lone Ranger, Tonto was most frequently called an "injun." In more than one episode, the Lone Ranger "helped" women who were put into men's traditional roles (sheriff, boss of the ranch, etc.) to understand they would be MUCH better off getting married and learning their place as bearers of children and cooks in the home. In The Cisco Kid, Pancho was the stereotypical lazy Mexican--silly, ignorant, and unskilled.
In old movies, blacks were used almost exclusively as servants, slaves, or comic relief because of their ineptness. When I was in high school, I watched the movie The Glass-Bottomed Boat, starring Doris Day (1966). I thought it was the funniest movie I had ever seen, and I must have watched it six times. A few years ago, I saw that it was on a cable channel late at night, and I thought, "Oh, I HAVE to see this. I remembered how funny it was. When I started watching it, I was truly embarrassed that I had found it funny; there is nothing but misogyny throughout the movie. I learned a BUNCH about how my views of women have changed since that time. And back in those days, the parts of "Indians" in films were played by "non-Indians"--almost exclusively played by white actors. Why? Because the people in charge at the studios held the belief that "Indians" were not smart enough to play the roles. Jay Silverheels (who played Tonto on The Lone Ranger was an exception.)
When I was in college, enrolled in the Army ROTC (Reserve Officer Training Corps), it was at the height of the Vietnam war. We had to read the army's official history book for one of the ROTC courses.Here is the actual wording from that official history book about how the West was won: "...the brave boys in blue defeated the savage redskin..." I was appalled by that. Not only was it a racist stereotype of Native Americans (now more properly known as Indigenous People), but it also ignored the atrocities of the army's treatment of those people--giving them blankets from diseased soldiers to them in trade, which wiped out entire tribes because they had not built up any resistance to white men's diseases.
My final comment here is that your friend has to learn that avoiding language that is offensive to others is NOT being "too PC." It is showing the respect for others that we would hope would be extended to us. She wouldn't like it if she were introduced as "my old lady" or "the ball and chain" or "the little woman" or "a sexy broad," would she? It's time for her to grow into a more compassionate social view.