What it means
Encrypting a Time Machine destination protects backup contents from someone who obtains the disk without its password. That password is required to unlock and restore files from the encrypted backup. A hint can assist memory but should not reveal the secret.
A real-world example
The Mac and its backup disk are both stolen. A separate password record can help restore on a replacement Mac. If the password existed only in the stolen Mac's keychain, recovery may be much harder.
What to do
Store the backup password in a reliable location independent of the Mac and disk. Test unlock and one harmless restore before relying on the arrangement.
The distinction that matters
Backup encryption is separate from FileVault on the Mac's internal disk. Saving the password only in that Mac's keychain makes a stolen or destroyed Mac a recovery problem. Apple's guidance states that the Time Machine backup password is required to restore encrypted files.
Apple's backup-password guidance
