Microglia contribute to development, homeostasis, and immunity of the CNS. Like other tissue-resident macrophage populations, microglia express the surface receptor triggering receptor expressed on myeloid cells 2 (TREM2), which binds polyanions, such as dextran sulphate and bacterial LPS, and activates downstream signaling cascades through the adapter DAP12. Individuals homozygous for inactivating mutations in TREM2 exhibit demyelination of subcortical white matter and a lethal early onset dementia known as Nasu-Hakola disease. How TREM2 deficiency mediates demyelination and disease is unknown. Here, we addressed the basis for this genetic association using Trem2-/- mice. In WT mice, microglia expanded in the corpus callosum with age, whereas aged Trem2-/- mice had fewer microglia with an abnormal morphology. In the cuprizone model of oligodendrocyte degeneration and demyelination, Trem2-/- microglia failed to amplify transcripts indicative of activation, phagocytosis, and lipid catabolism in response to myelin damage. As a result, Trem2-/- mice exhibited impaired myelin debris clearance, axonal dystrophy, oligodendrocyte reduction, and persistent demyelination after prolonged cuprizone treatment. Moreover, myelin-associated lipids robustly triggered TREM2 signaling in vitro, suggesting that TREM2 may directly sense lipid components exposed during myelin damage. We conclude that TREM2 is required for promoting microglial expansion during aging and microglial response to insults of the white matter.