GROUP 2: ALABASTRO, AGONCILLO, ARCANGEL, DEL ROSARIO, DUNGAO, GAZA, GONZAGA, SY

Point of View
In acknowledgement of the facts of the study, the researchers found it fitting to approach
the case through the point of view of the renowned historian, Ambrose Studebaker. In this case,
Studebaker assumes the role of an investor, a circumstance which gives the researchers the
proper footing to analyze the preconceived investment plans.

Case Background
Ambrose Studebaker, a nationally known historian, wants to secure additional money for
the next twenty years before he turns 60 and goes into retirement . He wants to find a fail-safe
way in accumulating that kind of money before he retires. In order to do this, Studebaker sought
the advice of Robert Morton, president of a firm that specializes in financial planning. Morton
proposed a financial plan which encourages Studebaker to borrow money from his household
equity of $30,000. However, after seeking a second opinion from Phyllis Comer, Studbaker was
able to recognize that the plan is problematic and disputable. He did, however, admit that this
plan uncovered two things Studebaker needed. First, is the need for a safe, long term and
tax-sheltered investment. Second, Studebaker has an excess yearly income in addition to the
funds that could be invested. As Comer reviewed Studebaker’s situation, she revealed that his
$30,000 excess in the money market fund would not be necessarily needed, and that he could
afford to have a 3,052 after-tax dollar reduction without disrupting his current lifestyle. All the
funds he will accumulate after 20 years would be good for an early retirement. In fact, Comer
even claimed that it can support educational financing of a newborn child.
Comer explains to Studebaker some investments he could accumulate to earn a high
return in the market. This includes SPA (Single Premium, tax-deferred annuity) and TDA
(tax-deferred annuity). SPA asserts that when Studbaker invests after tax-dollars, taxes on
accumulated interest are due on funds withdrawn. On the other hand, TDA explains that if
Studebaker invests before tax-dollars, he can grow money tax-free, and taxes are due on full
accumulated value. Furthermore, Comer gave three strategies to help Studebaker plan for his
investment. The first strategy was to leave the $30,000 in the money market and invest the
excess 3,052 after-tax dollars in the money market yearly. The second strategy is putting the
$30,000 to SPA and the excess 3,052 to TDA. The third strategy is placing everything on TDA.
Studebaker should also increase the amount in the TDA to its maximum of $12,000. Comer
then recommends using the money market funds to cover the shortfall of Studebaker’s yearly
expenses.
 Moreover, risks and penalties are not totally absent in commencing these strategies.
One unsafe instance is when Studebaker might need money but is prohibited to withdraw
without considerable penalties. For SPA, it is legally allowed to withdraw before the age 59 and
a half, however, a 10% penalty and income tax due are incurred. For TDA, withdrawal is not
allowed unless for the events of death, disability, separation from service, and hardship. Taxes
would be due if any funds are removed from the TDA.

Problem Definition

With the knowledge of Studebaker being eligible with two investment vehicles
(single-premium and tax deferred annuity), which investment strategy should Studebaker
consider after discussing with his economist friend, Comer, the numerous uncovered problems
present with the current strategy suggested by his local financial planner?

Analysis
In achieving a safe, long-term, tax-sheltered investment, Phyllis Comer gave three
investing scenarios on how Studebaker could grow his existing funds in time for his retirement.
The analysis broke down each scenario to deduce which financial strategy would work most
advantageously. The scenario presented by Comer are as follows:
(1) Leave the $30,000 equity as is, in the money market; Invest the income reduction of
$3,052 after-tax dollars per year in the money market as well
(2) Transfer and invest the $30,000 equity from the money market to a Single-Premium, Tax
Deferred Annuity (SPA); Invest the $3,052 after-tax dollars into a Tax-Deferred Annuity
(TDA).
(3) Transfer and invest the $30,000 equity from the money market to a Tax-Deferred
Annuity (TDA), along with the after-tax dollars of $3,052.

Moreover, Phyllis Comer has also recommended several investment firms Studebaker could
consider, provided with the knowledge of the interest rate and penalties for withdrawal each firm
is offering. The firms are as follows:
(1) Mahac Inc. (Single-Premium, Tax Deferred Annuity): 7% interest rate with no penalties
for withdrawals made after 2 years.
 (2) Northern Annuities (Tax Deferred Annuity): 7% interest rate with no penalties for
withdrawals made after a year.
(3) Modern Investments (Tax Deferred Annuity): 8% interest rate with substantial penalties
for withdrawals made before reaching age 55.
In the final analysis of Comer, she advised that Studebaker invest in Modern Investments
since she assumed that any money invested in the firm should grow an 8% return guaranteed
for the next 10 years, and transfer the funds to Northern Annuities after he reaches age 55. The
analysis of this case study will also consider this recommendation as part of concluding the best
investment strategy.

Investment Scenario 1 - Money Market Investment​Exhibit 1

By leaving the $30,000, as it is, in the money market fund for 20 years without
withdrawals, Studebaker could possibly accumulate a total of $56,987.85 less taxes due. On the
other hand, with his investment of the excess 3,052 after-tax dollars each year to the money
market fund, Studebaker could have a return of $63,096.58 less taxes. Investments made using
the after-tax dollars per year yielded higher returns throughout the 20 year investment period.
This investment scenario will generate a total of $123,084.43 with taxes due already subtracted.

Investment Scenario 2 - SDA + TDA InvestmentExhibit

​ 2 & 2.1

In analyzing this scenario, the group deemed it important to view first the activity from
the money market fund as Studebaker withdraws the $30,000 equity and transfers it to Mahac
Inc. as the SPA. As all annuities begin at the end of year one, the $30,000 equity is fully
withdrawn from the money market fund, leaving a zero balance and returns in 1997 (Year One).
In furtherance of the strategy, the $30,000 is placed into Mahac Inc. an SDA investment
entity. With a 7% interest rate, assuming that Studebaker makes no withdrawal at any point
between year 1 until 20, the SDA investment generated a total of $81,263.36 with taxes already
subtracted.
On the other hand, the $3,052 after-tax dollars are invested in a TDA Investment entity.
Since there are two TDA Investment entities, the group decided to speculate which entity will
yield higher returns. However, before investing the funds, the group recognized that TDA allows
before-tax dollars investments. Hence, the group converted the $3,052 after-dollars to
before-tax dollars of $4,360 to maximize the returns. Furthermore, the $4,360 is first invested in
Modern Investments which guarantees an 8% interest rate for the next 10 investment years and
5% rate for the following years. Modern Investments yielded $121,460.80 with taxes already
subtracted at the 20th year. Whereas, Northern Annuities, with an offer of 7% interest rate
generated a larger amount of $133,876.52 at the 20th year assuming that Studebaker makes no
withdrawals at any point between the 20 year investment period.
With this being said, it is better to work with Northern Annuities because this company
would amount to a bigger investment return. In total, the Investment Scenario 2 generated
$215,139.88 consolidated returns in year 20.

Investment Scenario 3 - TDA InvestmentExhibit

​ 3 & 3.1

The final scenario proposed by Comer is the investment of both the $30,000 equity and
after-tax dollars into TDA Investment. As aforementioned, the group deems it necessary to
initially view the activity in the money market fund. As all annuities begin at the end of year one,
the first movement in the money market was made in 1997. During this year, Studebaker needs
to withdraw $8,498 to maximize the investment for TDA. Even with the 3.58% money market
interest rate, the $30,000 equity is maxed out by the year 2000 leaving zero balance and return.
Now, as there are two TDA Investment entities, the group again speculated which entity
will generate the most return by the final year. However, in this scenario, the group considered
the recommendations Comer made in her final analysis. Exhibit 3.1 showcases Comer’s
Investment Scheme involving the Modern Investments for the first fifteen years and the Northern
Annuities for the remaining five years. For the first TDA investment scheme, the one proposed
by Comer, a $12,000 investment that partially came from the $30,000 equity was made through
years 1-3. This is the maximum value legally allowed for Studebaker’s TDA investment.
However, after the $30,000 was maxed out, the before-tax dollars of $4,360 were continuously
invested for the remaining years. This investment activity remained the same for the TDA
investment made through Northern Annuities. The only difference was the transition that
happened in Comer’s Investment Scheme. In her scheme, Modern Investments offered a
guaranteed 8% for the next 10 years, however, because of the 3% decrease in interest rate for
years 11-15, Comer thought it best to transfer the funds to Northern Annuities, hence making
the transition. In the end, Comer’s Investment Scheme totaled $197,335.75 of returns with taxes
subtracted. This is smaller compared to the investment in Northern Annuities in 20 consecutive
years which yielded $203,027.97 in returns with taxes subtracted.
Decision
In concluding an irreproachable investment strategy, the group employed a criteria patterned
to the wishes of Ambrose Studebaker. According to Studebaker, the investment should be safe,
long-term, and tax-sheltered. Therefore, the group concludes that the best investment strategy
is the second scenario which is the combination of SPA and TDA Investment, debunking the
final recommendation made by Comer. In analyzing the effectiveness of this investment
strategy, the group employs the criteria:
Safety
The underlying concern of Studebaker is the unforeseen event which may prompt him to
withdraw the investment incurring huge penalties. By investing in SPA and TDA, the federal law
prohibits him from withdrawals of any sort without incurring 10% penalty with income taxes due
unless in certain events covered by the law, which is unlikely to happen. However, the
investments made in this scenario are placed in Mahac Inc. and Northern Annuities. According
to their provisions, Studebaker is allowed to withdraw investments after 2 years at most. This
provision should repel the prohibitions delivered by the federal law.
Long-Term
The investments in this scenario are guaranteed to be effective for the 20 year investment
period Studebaker wishes to have. In fact, the two investment entities have secured an interest
rate consistent throughout the investing period. Unlike the case with the Modern Investments.
Tax-Sheltered
A part of this investment scenario allows Studebaker to invest before-tax dollars into
Tax-Deferred Annuity. This enables him to invest untaxed funds and grow the funds tax-free. On
top of this, the taxes are due on full accumulation value which is better than most income tax
dues.
Now that the investment strategy is proven competent by the criteria imposed and made
according to the wishes of Studebaker, the analysis of the decision will now focus on the yielded
return of the investment. As uncompromising as Comer’s final analysis may sound, the group
was able to debunk her idea of transferring funds in order to utilize the highest return rate of 8%.
The investment strategy of investing both in SPA and TDA yielded higher returns than Comer’s
recommendation. As a matter of fact, this investment strategy generated $215,139.88
consolidated returns which is the highest return among all investment strategies proposed in
this case study.
​Appendix:
Exhibit 1

Exhibit 2
Exhibit 2.1

Exhibit 3
Exhibit 3.1