I want to prove that the fundamental group of $\mathbb{R}^2 - \{0\}$ is isomorphic to $\mathbb{Z}$.
Given that I know $\pi(S^1) \simeq \mathbb{Z}$, and that if $A \subset X$ is a retract of $X$ implies $j_{*}: \pi_{1}(A, a_0) \to \pi_{1}(X, x_0)$ the induced homomorphism is injective, is the following reasoning correct?
I show $S^1$ is a retract of $\mathbb{R}^2 - \{0\}$ using the map $x \mapsto \frac{x}{||x||}$.
This then implies that $\mathbb{Z}$ is imbedded in $\pi_{1}(\mathbb{R}^2 - \{0\})$.
Letting $\gamma:[0,1] \to \mathbb{R}^2 - \{0\}$ be a loop, we can count the number of times it intersects itself, say $n$, which must be finite. We divide $\gamma$ into $n+1$ loops; each of these is of course homotopic to a loop around $S^1$. Their product then is homotopic to a loop that goes around the circle $n+1$ times, which means that $j_*$ is onto.
Is this alright, and can it be made simpler?
The spaces are homotopy equivalent! Consider the inclusion $\iota : S^1 \to \mathbb R^2\smallsetminus 0$ and the retraction $\pi : \mathbb R^2\smallsetminus 0 \to S^1$ you defined. Certainly $\pi \iota = 1_{S^1}$, and you can check that $\iota\pi$ is homotopic to the identity by means of the homotopy $$H : [0,1] \times\mathbb R^2\smallsetminus 0\to \mathbb R^2\smallsetminus 0$$ $$H(t,x) = tx+(1-t) x/\| x\|$$
This does not pass through $0$ because $1-1/t<0$ if $0<t<1$; geometrically, we are joining $x$ and its projection onto the circle, and this segment does not pass through the origin.
Another way to go around this ---which is what you can do to identify $\pi_1(S^1)$--- is to note that the complex exponential map $\mathbb C\to \mathbb C\smallsetminus 0$ is a covering and exhibits $\mathbb C$ as the universal covering of $\mathbb C\smallsetminus 0$. Because $\exp f(z) = \exp z$ means that $f$ is of the form $z+2\pi i k,k\in \mathbb Z$, this shows that the group of deck transformations of this covering is $\mathbb Z$, whence the result.