Investing in an employer’s provident fund or in your own retirement annuity is probably the most common way people prepare for retirement—mainly because these are regulated and restrictive. These regulations (like not being able to access your money before age 55) are meant to protect you, but they can also limit how much control you have over growing your retirement capital, especially if your fund is managed on your behalf by a fund manager.

So, what other types of investments can you use in your journey toward retirement?
Discretionary investments!

Discretionary investments aren’t governed by retirement-specific laws. Examples include buying shares (equities), unit trusts, exchange-traded funds (ETFs), endowments, rental properties, and even cash investments like government bonds, money market funds, or fixed bank deposits.

SHARES

A share is the smallest unit of ownership in a business, whether private or public. Public companies raise money by listing on a stock exchange and selling shares. Share prices rise or fall depending on market forces. If you sell a share for more than what you paid, you make a profit. You can also earn dividends if the company declares them. These are either paid out to you or reinvested into your share portfolio.

You can buy individual shares directly on the stock exchange, or indirectly through unit trusts, ETFs, or retirement annuities.

UNIT TRUSTS

Unit trusts are pooled investment funds sold and managed by financial institutions. There’s a wide variety of unit trusts available, investing in combinations of assets like shares, property, government bonds, cash, and even gold. Unit trusts are flexible, you can invest as much as you want and withdraw whenever you like.

When you invest in a unit trust, you own a unit, and the unit holders collectively own the trust.

South African unit trusts are well-regulated and highly transparent, making them a very safe investment. You can always see exactly how much you’ve invested and what your investment is currently worth. Even if the financial institution goes out of business, your investment in the unit trust is protected.

EXCHANGE-TRADED FUNDS (ETFs)

ETFs are bundles of different investments, like shares, property, or government bonds, grouped together in “baskets” and traded on the stock exchange like ordinary shares.
Instead of buying shares in one company, you can buy a basket of mixed investments on the exchange.

Most ETFs track a market index, like the Satrix 40, which follows the top 40 companies on the Johannesburg Stock Exchange (JSE).

ENDOWMENTS

Endowments are investments offered by big financial institutions, insurance companies, and banks. They're often seen as a forced savings tool because you commit to regular monthly contributions over a fixed period. You can also make a lump-sum investment, with the minimum term usually being five years (but often longer). These are typically used to save for specific goals, like a child’s education.

Endowments usually invest in a mix of assets like shares, property, bonds, and unit trusts.

BONDS

Bonds are loans made by you (the investor) to an organisation, such as the government, municipalities, or big companies, for a fixed period at a fixed interest rate. These entities use your money to fund various projects or operations.

As the investor, you earn a guaranteed interest rate over the loan period (which can be up to 30 years), and the interest is usually paid out every six months.

The key difference between shares and bonds is:

• Shareholders own a part of the company.

• Bondholders are owed money by the company or government.

Also, shares have no expiry date, while bonds do.
Bonds are usually traded in large amounts (typically R1 million per transaction), so individuals often access them through unit trusts or ETFs.

FIXED DEPOSITS

Most banks offer fixed deposits, where you invest a lump sum for a specific period at a fixed interest rate. The rate usually depends on how much you invest and for how long. The bigger and longer the investment, the higher the interest rate.

Funds in a fixed deposit generally can’t be withdrawn early. Some banks allow early withdrawals with notice, but this often comes with penalties.

SAVINGS ACCOUNTS AND MONEY MARKET FUNDS

A savings account is a highly liquid deposit account with a bank or financial institution that earns modest interest. It’s a simple way to save money you don’t need for daily spending.

Because the interest rates are usually very low, savings accounts aren’t suitable for long-term investing Your returns are likely to be lower than inflation.

A money market fund is similar to a savings account, but with more rules. You typically need a higher minimum balance, and there may be limits on how many transactions you can make each month. In return, you get slightly better interest rates.

Because money market funds usually don’t have a fixed investment term, they’re a great choice for an emergency fund.