Water heater manufactures recommend setting your water heater temperature at 120 degrees to help prevent scalding and to save energy. Scalding is a real concern if you have small children or elderly in your home.
If your hot water has an unpleasant odor, it is usually caused by some bacteria. Raising the temperature above 140 degrees may help, but bear in mind, the risk of scalding due increases dramatically once the water temperature is above 130 degrees!
Basically you'll need to adjust the temperature to suit your needs, or your budget.
How To Check Your Hot Water Heater Temperature
Allow your water heater to sit for one hour, unused before checking the temperature. Most water heater manufacturers will label the water heater with an FHR - First Hour Rating; this is how much water is heated to the temperature setting in one hour.
You can use a baking thermometer to check your water heater temperature. Go to the faucet nearest the water heater. Run the hot water for one full minute ( this will heat the plumbing supply lines, and give you a more accurate reading ). Fill a coffee cup from the faucet and read the thermometer.
About water heater settings:
Because heat rises (yes, even in water) the water in the top of a water heater can be much hotter than the water in the bottom. This is especially true of a gas water heater where the thermostat and burner are located at the bottom of the tank.
Water heater settings or temperature settings are not exact temperatures. The degree settings on a thermostat are approximate. This is especially true with gas water heater thermostats, and the temperature setting is sometimes based on whatever the person installing the water heater felt like it should mean! In other words, HOT could be 120, 130, 140 degrees, etc.
Gas water heater Adjustment
Gas water heaters use a simple knob on the front, bottom of the tank for temperature settings. Remember, the words or numbers on the front of the knob don't necessarily represent a set temperature. It is crucial that you closely check, and adjust the settings slowly. Test, then adjust. Repeat as necessary.
Electric Water Heater Adjustment
Adjusting an electric water heater temperature setting is not as simple. The water heater will generally have 1 or 2 heating elements. These will be covered by a plastic or metal panel cover on the front of the water heater tank. You will need to adjust each element to the same setting.
Before you do anything, remember to shut off power to the water heater, preferably via the electrical breaker in the electrical panel.
I generally recommend starting with the lower element, and then move to the top element. The cover will need to be removed, where you'll usually find some fiberglass insualtion you can reomve (with gloves). Then you'll find a simple plastic cover you can lilft or remove to find the thermostat. The thermostat will need to be adjusted with a flat head screw driver. Remember, adjsut slowly and carefully! Test as you go to find the ideal temperatuer for your home.
Replace the plastic cover(if you removed it). Place the insulation back over the thermostat and element. Replace the access panels and turn the power back on.