Is it appropriate to tell my boss that i find her constant use of the word "retarded", offensive?

I think that if you speak with her in private, and gently explain to her how you feel, that she may try to change. Use a quiet voice, look at her directly, and ask her to find another word to use in place of "retarded". I think this is just a habit that she has, and habits can be changed. She may not change right away, and she may slip up, so hang in there.