I'm a dad of 2 children, 4 years old daughter and my son is 2. Here's my 2 cents & what I've done so far and what I plan for the coming years :
At this age, they're of course unable to properly play stuff like Mario, Kirby, DKC, Megaman, Zelda and all that... Let dad or mom play to show them, but beside bright colors and memorable characters, they will get confused with a controller with 4 buttons + L&R. Your best bet is playing pinball games like Fantastic Pinball Kyutenkai for ps1 or those MS-DOS pinball tables because it only require 2 buttons. Speaking of MS-DOS games, Pac-Man is also worth a try for them. Anything arcadey will definitely get more their attention. Also I recommended strictly 2d stuff to begin because their brain will need a few more years to truly understand 3d and how to navigate using a controller. I played from start to finish Super Mario RPG and Cuphead (not retro I know) in front of my daughter and she enjoyed every minutes, even saying that the ending of SMRPG made her feel warm in her heart. We're close to finish Kirby Superstar and we did try to play Secret of Mana together but it's a bit too soon, I'll retry in a few years.

I plan to show them Super Smash Bros 64 using all the nintendo plushies and telling my children "hey kids, what if all these plushies were actually alive and would fight eachothers for fun?". They'll have a blast irl playing with their plushies that way until they are just a bit older enough so dad can falcon punch them into oblivion. I made a little list with some games to show them later like The Eye of Judgement on ps3 so they can see the cards coming alive on TV. There's also Deadstorm Pirates on ps3 for some on-rail fun, Katamary Damacy for the catchy music... I could go on but it's getting not retro at all so I'll just end my post with this : showing video games to kids can be a bad idea if done unsupervised. Gacha is gambling and you don't want your kid to be a gambler.