When a water heater begins leaking from the tank, it should be replaced immediately. Most manufacturers have at least a five-year warranty on the tank's integrity. Many heaters will last much longer than this. Older tanks should be inspected periodically for signs of corrosion. Tanks should be drained periodically as well. Replacement should be considered if rust flakes are present in the runoff from the tank drain.
A significant portion of your household energy bill goes toward heating water. In general, an electric water heater is less efficient that one powered by natural gas or propane. Mineral buildup on the heating element of an electric water heater will drastically reduce efficiency. Sediment buildup in the bottom of the heater will also reduce the heater's capacity and increase the energy consumption necessary to maintain water temperature during operation. A heater should be replaced as soon as a reduction in the amount of available hot water or increased energy demand is noticed.
Consider replacing a water heater when it is out of warranty and requires repairs more than once a year. Frequent replacement of simple parts can indicate wear in structural, electrical or gas fittings that are meant to last for the lifetime of the heater. Replacing a thermocouple is an inexpensive repair. Replacing the thermocouple housing and burner on a gas heater is expensive and, in most cases, impractical.
The average workload on a heater should be taken into account. Consider replacement when the number of people in a household changes significantly. A family of four may require a 60-gallon heater. A two-person family may only require half that capacity. Appropriately sizing a water heater will reduce the cost of operation by reducing excess heating or inadequate reserve.