The temperature on your water heater should be set so that it is just hot enough to satisfy your needs. However, many home owners don't know what the standard temperatures are and set the thermostat on their water heater too high! 120 degrees is more than adequate for household chores, and especially for showers and baths. If the temperature of your water is 125 degrees Fahrenheit, you only have about two minutes before you will be scalded.
Never set your thermostat higher than that unless you have a special need, like sterilizing eating utensils. And always tell family members or other people that live with you that you have raised the temperature of the water with the thermostat. If not, they could be scalded in the shower.
The only real time that you need hot water that is more than 120 degrees is when you do the dishes. The water doesn't even need to be that hot. Hot water that registers at 130 degrees will kill bacteria that can help with the spread of germs. However, this kind of temperature for hot water is generally run through the dishwasher. While you can manually wash dishes at this water temperature, you do so at your own risk. This is because this kind of hot water can actually scald the skin.
So really, there isn't a need to set the water temperature in your home to the point where it might scald someone. Just remember that any water temperatures over 120 degrees can hurt someone. So always check your water thermostat and let someone who lives in your home know that you have it on a higher setting. Also, lowering the temperature can have an adverse effect. If you have more the one person living in your home, they might run out of the shower freezing.
In effect, if you want to save money and control the thermostat on your water heater, it's a great choice for energy efficiency. But just like any other home improvements, you have to monitor it so that everyone is safe.
TIME / TEMPERATURE RELATIONSHIPS IN SCALDS
125° F 1 1/2 to 2 minutes
130° F About 30 seconds
135° F About 10 seconds
140° F Less than 5 seconds
145° F Less than 3 seconds
150° F About 1 1/2 seconds
155° F About 1 second
Table courtesy of Shriners Burn Institute