We just replaced our 1975 boiler and 1995 water heater (both gas) with a new high-efficiency boiler and side-arm water heater. The water heater is only a 40-gal unit, but it gives us more hot water at the tap than the old 50-gal stand alone unit did.
The tank temperature on the new water heater is held at 160 degrees and the outgoing water goes through a mixing valve that drops it to our desired setting. This makes the tank of hot water go a lot further than its 40-gallon capacity suggests. We can also add a programable thermostat to the water heater, to further reduce our gas consumption by letting the water tank cool down during periods of low demand. We haven't done that yet, though.
We're really happy with the new setup, and we've noticed that we no longer have to adjust the water temp while taking a shower. The shower temp stays pretty constant now, and we don't run out of hot water while the showers and washing machine (or dishwasher) are running at the same time.
We debated about putting in an on-demand water heater, but we got too many mixed reviews from people that had them. Of the folks we talked to, some loved them and others hated them. Everyone that had a side-arm water heater/boiler setup raved about it, though, so we went that route.
