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Fidelity Simplicity RMD Funds - Allocation Strategy with RMD Age (70.5) in Mind
If you want to manage your own glide path, and you want to keep it simple and cheap(er), why use hybrid funds of funds rather than the underlying funds?
Cheaper, because you won't be paying Barclay's second layer of management fees. (Since the thread is about managing RMDs, IRAs are assumed; realizing gains as one adjusts allocations to follow glide path is not a concern.)
Simpler, because you can just buy whatever percent of each underlying fund that you want. Also, because with just four funds and seven underlying funds (plus cash), it may be theoretically impossible to get the mix that you want (unless you happen to luck out, e.g. if you want exactly AOK's mix, then you can get it by buying just that fund).
Let's say you don't care about the mix of domestic stocks, the mix of foreign stock, the mix of domestic bonds, and the mix of foreign bonds. You're keeping it simple. You just care about these four percentages. Here's how you could do that with four funds:
For an allocation of 40/20/35/5 (domestic/foreign/domestic bonds/foreign bonds): ITOT (Core Total Market) 40% (0.03% ER) IXUS (Core Total Int'l) 20% (0.11% ER) IUSB (Core Total US Bond) 35% (0.06% ER) IAGG (Core Int'l Bond) 5% (0.09% ER)
Blended ER = 0.06%, vs. 0.25% for a mix of AO* funds.
While you'd like to get the same ratios using the AO* funds (which would involve solving four simultaneous linear equations), you discover that no matter which fund(s) you use, you're going to have just as much foreign stock as domestic, even if all you want is 1/3 foreign. These don't let you manage your current asset allocation (let alone a glide path) beyond a basic stock:bond ratio.
AOA is approximately 41% US stock, 40% foreign stock, 16% US bond,3% foreign bond, AOR is approximately 31% US stock, 30% foreign stock, 33% US bond, 6% foreign bond, AOM is approximately 21% US stock, 20% foreign stock, 50% US bond, 9% foreign bond, AOK is approximately 16% US stock, 15% foreign stock, 58% US bond, 11% foreign bond
Comments
Cheaper, because you won't be paying Barclay's second layer of management fees. (Since the thread is about managing RMDs, IRAs are assumed; realizing gains as one adjusts allocations to follow glide path is not a concern.)
Simpler, because you can just buy whatever percent of each underlying fund that you want. Also, because with just four funds and seven underlying funds (plus cash), it may be theoretically impossible to get the mix that you want (unless you happen to luck out, e.g. if you want exactly AOK's mix, then you can get it by buying just that fund).
Let's say you don't care about the mix of domestic stocks, the mix of foreign stock, the mix of domestic bonds, and the mix of foreign bonds. You're keeping it simple. You just care about these four percentages. Here's how you could do that with four funds:
For an allocation of 40/20/35/5 (domestic/foreign/domestic bonds/foreign bonds):
ITOT (Core Total Market) 40% (0.03% ER)
IXUS (Core Total Int'l) 20% (0.11% ER)
IUSB (Core Total US Bond) 35% (0.06% ER)
IAGG (Core Int'l Bond) 5% (0.09% ER)
Blended ER = 0.06%, vs. 0.25% for a mix of AO* funds.
While you'd like to get the same ratios using the AO* funds (which would involve solving four simultaneous linear equations), you discover that no matter which fund(s) you use, you're going to have just as much foreign stock as domestic, even if all you want is 1/3 foreign. These don't let you manage your current asset allocation (let alone a glide path) beyond a basic stock:bond ratio.
AOA is approximately 41% US stock, 40% foreign stock, 16% US bond,3% foreign bond,
AOR is approximately 31% US stock, 30% foreign stock, 33% US bond, 6% foreign bond,
AOM is approximately 21% US stock, 20% foreign stock, 50% US bond, 9% foreign bond,
AOK is approximately 16% US stock, 15% foreign stock, 58% US bond, 11% foreign bond