A method for optimizing performance of a system includes determining, via a controller, a state of health (SOH) for each of a plurality of components of the system, and determining a state of function (SOF) of the system using the SOH of each component. The method includes estimating the remaining useful life (RUL) of the system using the system SOF, selecting a cost-optimal control strategy for the system using a costing model, and dynamically, i.e., in real time, executing the selected strategy to extend the estimated RUL. The method may include comparing the selected cost-optimal strategy to a calibrated performance threshold, and executing the selected strategy only when the selected strategy exceeds the threshold. A system includes first and second components and a controller. The controller dynamically executes the above method with respect to the components, which may be a traction motor and battery in one possible embodiment.