well… the good news is that this is ridiculously easy on a imac 🙂
What we did for my inlaws was buy a portable Western Digital of the appropriate volume, and velcro it to the back of the iMac. Completely invisible, not power plug required, it just sits there doing it’s thing.
Timemachine is equally as user friendly – it’s on all the time, running in the background. It makes hourly incremental backups, so it’s good if you accidentally delete something (the recovery interface is also idiot-proof).
When you plug your new hard-drive in, I think it’ll even ask you if you want to use it for time machine. Seriously – it couldn’t be easier.
As for volume, 700gb is not very big these days. TM needs a bit of space to work, so I think I would probably get a 1.5 or 2tb version.
When you upgrade to sierra…..you won’t (shouldn’t?) lose any data as a matter of course. Obvioulsy make sure you have a backup done just-in-case, but you won’t need to do anything yourself other that pressing “go” on the updgrade.