We just replaced all of our towels (4 doz of each size). The last time was 3 years ago.
Sheets I replaced 3 years ago as well. Got a poly-cotton blend to cut down on the ironing. If you can find no iron 100% cotton, I'd go with that. Cotton is just softer to the touch.
My advice is whatever you decide on for thread count, etc, buy the best quality you can afford.
If you can, do what I did and buy a couple of 'demo' towels and sheet sets. Wash & dry them and see how you like them. We did that with the towels and it was worth it considering how much I was going to plunk down on buying them.
If you have a Home Goods/Marshalls/TJ Maxx near you they generally carry good quality sheets and towels that are marked down because they're out of style, end of run or there are just not enough of them for the original store to try to stock them any more. I've gotten some nice, high end designer sheets at Home Goods. And, I've gotten some truly lousy Laura Ashely sheets at Kohls.