How do you blend skin tones on busts without it looking chalky?

Nine times out of ten that chalkiness is the water thinning, not your brush. Water doesn't just make paint thinner, it breaks down the binder, so once you water craft paint down past a certain point you end up laying down pigment that barely holds togehter when it dries. It looks fine wet, then goes dusty. Craft store acrylics make this worse because they have less pigment and weaker binder than hobby paint to begin with. Thinning with a few drops of matte medium or even a glazing medium instead of straight water keeps the binder intact while still letting you do thin passes, and that alone usually kills most of the chalkiness on its own.

The second culprit, especially on deep browns, is how you're getting to the highlights. If you're bumping dark skin up just by adding white, you're basicly milking the whole area, and milky layers over dark read as chalk. Highlights on dark skin should shift warm. I mix my highlight steps out of the base color with orange and a touch of yellow, maybe a tiny bit of white only in the very last step on the top planes. Cheekbones and forehead will look like light is actually hitting them rather than like someone dusted them with powder.

On the retarder question, yes, try it, a bust face is exactly where it earns its keep. Wet blending on a face that size opens up a whole different workflow than 28mm figures. Put a couple of drops of retarder in your midtone, block in broad areas, and you'll have several minutes of open time to soften the edges where cheeks meet shadow. People on small minis mostly stipple and glaze because there's no room to blend. On a bust you can actually paint like a flat painter does, wet into wet, and the retarder is what makes that possible without the paint skidding under your brush.

One more thing, count your layers. If it's chalky specifically on the high points, you may be stacking ten-plus diluted passes there and every pass adds a little texture. Fewer, slightly more pigmented layers with medium will sit smoother than a mountain of water-thin ones. And get a wet palette if you don't have one alredy, mixed skin tones are nearly impossible to reproduce batch to batch otherwise.

This is helpful because I had the same dusty look on a bust I tried last year and gave up on it. I was adding white straight from the pot to lighten things and wonder now if that was half my problem too. Question though, when you say mix the lighter steps with orange and yellow, do you mix those all up ahead of time or do it on the fly while painting?

I'd hold off on the retarder advice for now. I tried that exact route on a bust a while back and all it bought me was paint that stayed tacky for ages and picked up every stray bit of dust in the room. Any edge I went back over with a damp brush lifted the first layer straight off instead of blending into it. Maybe it behaves better with proper hobby paint, but with cheap pots it just turned my session into a mess. Do the medium thinning and the warmer highlight mix first, get comfortable with that, then decide if you actually need the open time.