The problem with inbreeding isn't that you'll have a retarded kid with your sister. It's that, if you continue the process for 5 or 6 generations, you'll start to build up a lot of crappy double-recessive traits and eventually your great-great grandkids will start having retarded kids. (The other problem with inbreeding: it's icky to be with your sister, even if she's hot.)
It's essentially the problem of small population size -- small populations tend to have (bad) mutations build up very quickly, while large populations have mutations build up very slowly. If you marry someone who's not closely related to you, you're functioning genetically as if you're in a population of thousands or millions of individuals (thousands if you live in a small town and nobody ever leaves; millions otherwise.) If, on the other hand, you marry someone closely related to you, you're functioning genetically as if you're in a population of size 2 or 4 or 8 (depending on exactly how close.) Having an effective population of size 2 for 6 generations is bad news.