This paper presents a replacement strategy for an aged transformer based on condition monitoring and system risk.The condition monitoring measurements are used to estimate the insulation age of the transformer.The unavailability because of transformer aging failure is calculated using the insulation age instead of the traditional natural age.The system risk is assessed using the total unavailability from both aging and repairable failures.The expected damage cost and benefit due to delaying the replacement of the transformer are evaluated.The best replacement timing is determined as the year when the replacement of the transformer reaches the maximum net benefit.A case study for two aged transformers in a utility system demonstrates the effectiveness of the proposed method.