If you choose the other path, where FileVault generates a recovery key and displays it, you need to make sure and write it down or enter it electronically, and store it securely in such a way that you’ll have access even when your Mac can’t be booted. (The process is a little involved: Apple describes it in the section “Reset using the Reset Password assistant (FileVault must be on)” in this support document.) You never see the recovery key nor have to enter it in this configuration. It’s fully encrypted in such a way that even Apple doesn’t have access to the unencrypted recovery key data, but Apple can deliver the encrypted recovery key to your Mac if you need to reset your password. If you choose iCloud, the recovery key isn’t stored loosely in iCloud Drive or as a file, but it’s tied into behind-the-scenes account information that Apple maintains. You can opt to store your recovery key as part of your iCloud account for password resets.
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