This is something I genuinely think has been lost more and more in the greater discourse. During Smash 4 it was generally understood that, like you said, a "retro character" had a very specific meaning: a first party character from a dead, usually-one-off game for the NES, SNES, or GameBoy. A character that was done and dusted by the time those crazy things called "polygons" came and hit the scene.
Characters like Takamaru, Mach Rider, Muddy Mole, Sukapon, Bubbles, Tamagon, Balloon Fighter, Donbe and Hikari, the Prince of Sablé, Lip, Urban Champion, Hakkun, Sheriff (an arcade character, even), Diskun, hell even the Ice Hockey trio. Those are the ones that fit the older, well-understood definition of what a "retro character" was.
Using it for characters like Simon and Pac-Man never felt right to me. Like...Castlevania and Pac-Man still get games. Simon is no more a retro character than Marth is. Not to mention it's a category that used to pretty much exclusively mean first party characters, since the characters that would fit for a third party variant...wouldn't be the types picked for Smash to begin with, lol.