As I have more of a personal kind of attachment to this word than a lot of people, this thread poses somewhat of an interesting question to me. This is a somewhat lengthy post, and yeah I realize I type a lot, don't need to tell me that twice. Anyways, hopefully at least someone will enjoy reading this... maybe.
To start off with my own personal life, the only mental illness I really have is being mildly autistic. This is pretty mild and never really affected my life in any significant way outside of being unable to actually speak on my own until I was 5, but I feel that it needs to be mentioned here anyways. My little brother, on the other hand, has a much more severe case of autism and has been identified as being mentally retarded. He is currently a sophomore in high school and will be 16 on May 21st, for those who are curious. Anyways, this has had a profound affect on him, both in the eye of the public and at home. At his high school, he gets bullied a lot due to the way he acts there. Because of this, he often finds it difficult to make any new friends beyond the small group that he has and has a lot of difficulty coping with it by himself. I actually had no idea that he even got bullied as much as he did until recently when something happened with him that, for his privacy's sake, I will not talk about. All that really needs to be said is he ended up getting into a lot of trouble and got suspended for it. It was actually brought to my attention by my parents that he was even getting bullied in the first place through this said event. He also gets a lot of comments that he is retarded since he cannot do a lot of very basic things on his own without being told how, nor does he understand why it's important to do these basic daily tasks no matter how much it's explained to him. He also cannot think for himself a lot of the time and, as a result, resorts to simply asking me to help him with the most basic of homework assignments and asking for others' opinions so he can follow the more popular opinion in an attempt to fit in. This makes it difficult for him to do good overall on class tests or with standardized testing.
More personal experience aside, I'm sort of mixed, both on my usage of the word and what I think about people when they use the word themselves as well as when I think it's appropriate vs not appropriate to use. In terms of my usage of the word, I don't seriously use it as a means of insulting people nor do I use it at all out in public. However, in a casual setting, either with my family or with friends, this is completely different. With my family, a lot of my usage of retard just comes down to me saying that something is "retarded" because it just seems stupid to me. We don't take the word in a serious manner when casually talking because it's just used so much between all of us that we're just used to it at this point. The same thing pretty much applies with friends, more so with friends that I've known for a long time because I know that they can take and accept the fact that I'm always joking around when I just casually throw the word "retard" out with them. The other use I really have with the word is when I'm talking with my parents about my little brother, since I find it better to just be more formal about that as technically he is classified as "retarded". I know people will still likely flame me, but there's a difference between secretly calling my brother retarded insultingly behind his back just to do it (which I can assure you I'm not doing) and bringing up my brother's mental retardation to my parents. Regardless of what you think of that, that just about sums up my usage of the word. As for when I think it's more appropriate to say vs not appropriate, I think it's more appropriate to use in a casual setting where people know you're just joking around, i.e. with friends or maybe family. I also think it's appropriate to bring up the word in the context of someone who is actually classified as such, such as the case with my little brother. However, there's a fine line to cross when using the word in my opinion, and that's when you start to actually use it in a seriously insulting manner to the point where you actually mean to cause someone harm or hurt with the word. I also don't think it's exactly appropriate to mention it out in public no matter what the circumstance is. If you really think something is retarded, keep it to yourself, no one actually cares out in public, or at least I don't care enough.
Anyways, I've talked quite a lot and I think this is way more than enough for people to read, so although I'd like to say more, I think this is fairly lengthy enough on its own and there's no point for me to drone on further on the subject. However, do not ask me for anything else regarding my little brother, as for his sake, I rather keep everything else about him classified. To end it off, I already feel the comments that I'm a douchebag for using retard in such a casual way with the way my little brother has been treated from a mile away. Sure, you can argue that, but my counterargument is that we're not ever insulting him for it. Infact, we're all helping him make it through his rough times in my family, we just happen to use the word more casually compared to others and we don't take it so seriously like some others do. However, this doesn't mean that I don't understand why someone may get insulted by others using it, especially in my situation, I simply can't empathize with others like that in the same way.