Thank you Kevin. You're story sound extremely frustrating.
So when the shift rod is set exactly to spec, I get forward without any issues but reverse isn't quite catching (doing a bit of grind). But if I put a bit of pressure on it with my finger (motor end) and move it an additional 2 - 3 mm it engages.
Yes, it was extremely frustrating and I had almost the exact same symptoms as you. I could easily engage reverse and it would go into forward, but I started noticing that when I was at light throttle I would feel a clunk. The first time I heard it I thought I hit a stump. Under more throttle it was never an issue but the low-speed clunk became more frequent so that's when I started investigating.
When I finally got down to the shift rod I couldn't get it to the correct height. That's when I started chasing leads all over the internet and Faztbullet helped point me in the right direction.
I don't want to jump to conclusions and say you also have the wrong shift rod, but the symptoms are similar. I don't have any manuals to reference, but this chart I found shows your shift rod height should be 26 29/32" (683.25mm).
If that's true, your problem could simply be an improper adjustment. The rod moves down for reverse and if you have it too short it will easily pull up for forward but won't quite reach low enough to fully engage the clutch dog for reverse.
I'd suggest you find a model # somewhere and verify this rod length against that number to be 100% certain. Once you're confident of the right length and have it set, disconnect the shift cable from the linkage and reinstall the gear case . With the motor off and key out of the ignition, manually move the linkage to forward gear. Does the prop lock into gear and you can't spin it counter clockwise? Next manually move back to neutral position. Does the prop spin freely in both directions? Finally, manually move the shift linkage to reverse position. Does the prop lock and you can't move clockwise? If all these are true, that means your shift rod is properly adjusted.
Now, with the linkage centered in neutral, hold the shift cable into place and thread the adjuster in or out until the mounting locations line up with the retainer bracket (the one you pictured) and the mounting pin on the linkage. If this all works out right, you should have clean shifting between F-N-R.
Oh, and after all of this, be sure to drain your gear case oil through a fine mesh to look for metal shavings and also inspect your magnetic drain plug. If you see large shavings you have damage to the gears. If it's just fine material you should be okay.
KJ