SEARCHING FOR PARADISE LOST AFTER A 15-YEAR IDYLL, A FAMILY'S ADJUSTMENT TO MIDDLE-CLASS LIFE HAS BEEN EASED -- FOR NOW -- BY AN INHERITANCE THEY MAY BE SPENDING TOO FAST. A LARGE BEQUEST DOES NOT ALWAYS ENSURE FINANCIAL SECURITY. AND THEIR SAVINGS MAY MELT AWAY.
By JOHN MANNERS

(MONEY Magazine) – Five years ago, Pierre and Laura Somerhausen enjoyed a lifestyle that Robin Leach might have fawned over on his Rich and Famous TV show. Pierre was making $80,000 a year for just seven months of seasonal work as manager and part owner of Madrigal, a chic waterside restaurant on the jet-set island of Ibiza (pronounced ee-beeth-ah), off Spain's Mediterranean coast. Laura ran two local clothing boutiques, more for fun than profit, and split the rest of her time between swimming, playing tennis and taking care of their three kids and sprawling hilltop home with the help of a full-time maid, gardener and live-in nanny. Looking back wistfully at her 15 years on the island, she says: ''I was living on a cloud.'' Today, after a recession-triggered crash in Ibiza's tourist industry and several wrenching financial reversals, the Somerhausens have fallen to earth in suburban Miami, where they're finding conventional middle-class life a challenge. Belgian-born Pierre, for all his worldliness and business savvy, has earned a total of only $15,000 over the past three years while obtaining his state real estate license and starting to build a client base. The youthful Laura (who like Pierre is 43) went back to nursing, a profession she hadn't practiced since 1974, working as much as 48 hours a week to bring in a maximum of $38,000 a year. The children -- Suzanne, 15, Nicholas, 13, and Jessica -- have had to adjust to U.S. schools and to English as a first language. In addition, the Somerhausens for the first time are confronting financial concerns that are all too familiar to most Americans: saving for college and retirement and paying for health, life and disability insurance. All were matters they could ignore on Ibiza since, even though Laura is a U.S. citizen and Pierre a Belgian national (the kids hold dual U.S. and Spanish citizenship), as residents they were entitled to the munificence of the Spanish welfare state. The one bright spot in their finances stems from a sad event: the death of Laura's mother, Frances Chaiet, who succumbed to liver cancer 17 months ago. Frances left Laura, her only child, assets worth $360,000. But she sealed most of the money in a trust, perhaps worried that Pierre and Laura might again suffer losses as devastating as those on Ibiza. While the trust was an unusual complication, the task of handling a sizable bequest is an increasingly common one. Thanks to post-World War II prosperity, the average net worth of U.S. households headed by persons 65 and up is $258,000, and the average inheritance they will leave their baby-boom children -- now between the ages of 29 and 47 -- is about $50,000. Recipients of such sums have important decisions to make about spending, saving and investing -- matters that call for more caution than the Somerhausens may be exercising. Once they pried the inheritance loose from the trust, which consumed $34,000 in legal fees, they sank $57,500 into a new house -- only to have it ravaged by Hurricane Andrew, running up $54,000 in bills that fortunately were covered by insurance. They also spent $40,000 on cars, furniture and moving expenses and lost another $10,000 in the stock market. Now, chastened but still upbeat, they need advice on how to manage the roughly $245,000 that remains -- their entire savings -- so that it can cover not only their children's education but their own retirement as well. Such concerns were far from Laura's mind when, at 26, she quit her job at a hectic New York City hospital to travel in Europe. Stopping in Ibiza, she met Pierre, then part owner of a popular tourist bar. She stayed, and they had three children as Pierre's businesses flourished. By the late 1980s, though, Pierre's half interest in Madrigal left them overextended and vulnerable to the downturn that shaved tourist traffic 20% between 1988 and '89. To pay the elegant restaurant's bills, the Somerhausens took out a $150,000 mortgage at the then prevailing Spanish rate of 15% on the 4,000-square-foot ; villa they had built for about $200,000 over the previous six years. But even that wasn't enough. By the end of '89, Pierre was forced to sell his share in Madrigal -- and the $220,000 proceeds barely covered his business debts. He and Laura put their house on the market for $350,000, turned down an offer of $280,000 and stopped making their $3,000 monthly mortgage payments in hopes of a quick sale at a higher price. Then they left for Coral Springs, Fla., 40 miles north of Miami, to be near Laura's recently widowed mother. ''I always said we'd move to America only if we had a million dollars or none at all,'' says Pierre. ''It turned out to be almost none but, well, that's what this country is all about, isn't it? Starting over.'' With $20,000 saved from the sale of the restaurant, they rented a $900-a- month apartment, and Laura returned to nursing, working nights and weekends at a nearby hospital. The children, who spoke mostly Spanish, settled into bilingual classes in the local schools. And Pierre began working toward his real estate agent's license. To supplement their income, they sold clothes salvaged from Laura's boutiques ($1,500) and a few antique books Pierre had been given by his parents ($2,500). What's worse, they got no other offers on their house and eventually had to abandon it to the bank. ''We weren't very practical,'' Laura concedes. ''The house was our creation, our proudest possession. We couldn't bear to sell it for less than it was worth, and so we lost it.'' Early in 1991, Laura's mother -- who was already suffering from liver cancer -- gave the Somerhausens $20,000 for a down payment on a $102,900 three- bedroom condo in nearby Parkland. (The couple financed the rest with an $82,900 fixed-rate mortgage at 9.5%.) Then, just before her death in October 1991, Frances announced that she had made out a new will that would take care of Laura for the rest of her life. Laura was puzzled, because her mother's previous will, written shortly after the Somerhausens arrived from Ibiza, had left her everything in any case. The new will had a catch. Frances' $340,000 of insurance, annuities and other financial assets (excluding the $20,000 equity she had in her own condo, which went directly to Laura) were in a revocable living trust, which stipulated that Laura was to get $25,000 a year for as long as the money lasted. Evidently her mother, like many Florida retirees, had attended an estate- planning seminar where a broker pitched the value of living trusts for preserving assets and avoiding probate. The broker had referred her to a lawyer, who set up the trust with the broker as trustee. When the broker wouldn't even tell Laura and Pierre how much money was in the trust, though, they found a lawyer of their own -- in the Yellow Pages. After he threatened to file a suit charging the broker with giving Frances unsuitable advice, the trust was quickly dissolved without a court fight. In January 1992, the Somerhausens received $306,000 -- the proceeds after subtracting their lawyer's 10% contingency fee. Pierre and Laura knew they had decisions to make and, characteristically, they decided to make them in style. They splurged $4,500 on a week in Costa Rica (Laura's aunt stayed with the kids) and, there, amid the familiar surroundings of a sleepy Latin resort, they resolved to move from Parkland to Miami. Pierre had established himself at the Boca Raton office of Keyes Co., a South Florida real estate agency. But they thought he would do still better at Keyes' office in Miami Beach, where his five languages -- English, French, Spanish, Dutch and German -- would give him an edge with the growing number of overseas buyers. In May they found a 3,000-square-foot, four-bedroom house in South Miami on a densely landscaped one-third acre beside a canal. ''It had so many trees we could barely see the neighbors,'' says Laura. They paid $230,000, putting down $57,500 from the inheritance and borrowing $172,500 in a 40-year variable-rate mortgage (currently 6.8%) with a monthly payment of $895. Pierre sold their condo for what they had paid. Laura found per diem work with a Miami-area hospital staffing agency. The kids were enrolled in the highly regarded Palmetto-Pinecrest public schools, and the family made plans to move in time for opening day. Their life in America seemed finally on track. Then, a week before the move, Hurricane Andrew tore across South Florida. ''Houses all around ours lost roofs and valuable possessions,'' says Pierre, ''so we were lucky.'' Relatively speaking. Their roof was spared, but their heavy wooden front door was blasted through the house and out the glass doors in back. Their pool enclosure was destroyed, and they lost most of their prized palms and fruit trees. Fortunately, the $715-a-year State Farm homeowners policy they had taken out with the mortgage covered the losses. Two months later, just as the house was becoming habitable again, Nicholas, who had been epileptic as a young child, suffered a seizure, his first in eight years. He recovered fully, but because Laura's per diem job didn't include medical insurance, the family had to pay the $5,000 tab themselves. Laura eventually got insurance when she accepted a full-time post with her company. But then fate dealt them another wild card: Within weeks, the FBI seized the firm's records on suspicion of fraudulent Medicare billing. Laura wasn't implicated, but she was out of a job and had to take part-time hospital work earning $25,000 a year. The family now pays $292 a month to continue her old coverage under COBRA while searching for an insurance plan that will accept Nicholas with his pre-existing condition. Even if they find a policy, their financial security will be far from assured. Neither Pierre nor Laura has life or disability coverage; they have no savings earmarked for college or retirement; and their blithely optimistic approach to spending and investing may put their inheritance at risk. Besides their other expenditures, they've dropped $12,500 on moving and closing costs, $5,000 on new furniture and $23,000 on two cars (a $17,000 1987 Mercedes 190 sedan, for which they paid cash, and an $18,000 1992 Jeep Cherokee, on which they owe $12,000 at 10%). Plus they owe about $3,000 on credit cards and $9,000 on a margin loan for home renovations. Only $245,000 -- about two- thirds of the original inheritance -- is still in liquid investments. They started their investment program last April by putting $100,000 into each of two Merrill Lynch capital management, or ''wrap,'' accounts, which are invested by the firm's money managers (the rest went into a cash management account, or CMA, earning about 3.2%). One wrap account was invested aggressively in growth companies, the other conservatively in blue-chip stocks and high-quality bonds. Both had a 3% annual management fee. Almost immediately, the aggressive account nosedived to less than $90,000. ''We freaked out,'' says Laura. ''We'd never invested before, and we had no idea how volatile the market could be.'' But after bailing out of the aggressive account, they watched it climb to 115% of its initial value. ''It was an expensive lesson,'' comments Pierre. Now, using the proceeds from the closed account, they have begun to pick stocks on their own through a discount broker. From July through January, relying on intuition and avid reading of the financial press, they invested a net $83,745 (including $1,753 in commissions) in 25 different companies, among them Motorola, TelMex and Hitachi. As of Feb. 1, these stocks -- and the Merrill Lynch wrap account -- were both up about 5% to 6%. ''We're not going to lose our money, because we're well diversified,'' vows Laura. ''And we won't spend any more of the inheritance, because we're going to be making a lot more income soon. Pierre has started successful businesses before, and he'll do it again. He already has a dozen real estate clients in Miami Beach.'' Pierre shares her sunny outlook: ''It's great to be starting over. I feel 20 years younger.'' But old habits die hard. In late January, the Somerhausens took off for a 10-day skiing vacation in the French Alps, something they used to do regularly during their palmy days in Ibiza. The cost: $7,000. Says Pierre, summing up the family philosophy: ''We don't think we should wait until we retire to enjoy ourselves.''

THE ADVICE Rethink your investments. Harold Evensky, a partner with Evensky & Brown, a Coral Gables financial advisory firm, questioned the Somerhausens' current investment strategy. ''Counting what you lost,'' said Evensky, ''your holdings are worth just about what they were when you started last April. But you would be 11% ahead if you had invested in a simple index fund, like Schwab 1000, that tracks the stocks of the 1,000 largest U.S. public companies.'' As for the remaining Merrill Lynch wrap account, he said: ''The 3% fee is too high, especially since you're not getting individual attention. It's just a very expensive mutual fund.'' Evensky added that he thought the couple were unlikely to beat the pros by picking their own stocks. So he recommended that they shift their whole $200,000-plus stash into a diversified portfolio of a dozen no-load mutual funds, including such top-performing stock funds as T. Rowe Price Equity-Income (up 14.1% in 1992) and bond leaders like Pimco Total Return (up 9.8%). Evensky figures this mix should average at least a 5% annual return after inflation. Pay down debts. Planner Marianne Shine of Deerfield Beach, Fla. urged them to use the $28,000 left in their CMA to retire their car and credit-card debts and pay off $3,000 of the margin loan. That would reduce their nonmortgage debt to only $6,000 and leave them a $10,000 emergency cash reserve, equivalent to four or five months of living expenses. ''There's no place you could put that money that will earn more than you'll save by paying off those loans,'' said Shine. She also recommended that they refinance to a low fixed- rate mortgage, since lending rates may soon go up. Insure against income loss. Pierre doesn't have enough earnings to qualify for disability coverage, Shine said, but Laura should buy a policy that would replace about two-thirds of her income, starting 90 days after she became disabled and lasting her lifetime (cost: about $2,000 a year). She also advised them both to buy at least $200,000 of term life coverage -- enough to retire their mortgage if either dies (cost: $575 a year). Start saving for college and retirement. Finally, Shine suggested earmarking funds for college and retirement to encourage disciplined investment. Pierre and Laura should both open Individual Retirement Accounts, since neither is covered by a retirement plan at work and both are thus eligible for the full $2,000-a-year tax deduction. They should also look into Florida's state-backed tuition prepayment plan, in which they could pay $15,943 now and cover the projected $33,523 total tuition for all three kids at the University of Florida at Gainesville. If the kids go elsewhere or win a scholarship to the school, the money will be refunded.

Just before leaving for France, the Somerhausens solved one pressing problem: They found a health maintenance organization that, for $262 a month, would accept Nicholas with a rider excluding hospitalization for his epilepsy -- care Laura felt won't be necessary. They also planned to drop the last wrap account, pay down their debts, shop for disability and life insurance and look into college prepayment. But they felt they were doing a good job of picking their own stocks. And though they planned to open IRAs for the tax benefits, they didn't want to save any for retirement beyond that. ''When the time comes,'' explained Laura, ''if we're a little short of cash, we'll move to Costa Rica.''

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: EASY COME EASY GO Having spent a third of their $360,000 inheritance in a year, the Somerhausens need to manage the rest more carefully.