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I have an iPhone 4, and that's not likely to change any time soon (unless I break it). Being a 4, it can only use iOS 7; I can't install iOS 8 on it.

On my Mac, I've installed OS X 10.10 Yosemite. Yosemite offered to upgrade to iCloud Drive, BUT: I don't have iOS 8, so my iPhone wouldn't be able to use files in iCloud anymore, right? ...the phone wouldn't be able to use iCloud Drive, right? And Yosemite needs iCloud Drive, so until I upgrade to iCloud Drive, my Mac can't use files in iCloud anymore, right? ...Yosemite can't use the old system?

So what should I do? Do I have to choose to use iCloud with either my Mac or my iPhone? Should I go back to Mavericks? Is there something I'm missing, or is there any other way?

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You are correct. From John Siracusa's extensive OS X 10.10 Yosemite review: (emphasis mine)

Upgrading is not mandatory, but iCloud Drive completely replaces the old “Documents & Data” item in the Yosemite’s iCloud preference pane. Applications like TextEdit and Preview won’t provide access to any form of iCloud document storage in Yosemite until iCloud Drive is enabled. You’ll be prompted to upgrade during the account setup process. If you decline, you can upgrade later by enabling iCloud Drive in the iCloud preference pane.

And Apple's KB page, specifically addressing iPhone 4 customers at the end:

iPhone 4 customers

iPhone 4 does not support iOS 8 or iCloud Drive. If you upgrade your iCloud account to iCloud Drive, you will not be able to use iCloud with Pages, Numbers, or Keynote on an iPhone 4. You’ll still be able to use the iWork apps on an iPhone 4, but without iCloud.

As for what you should do, I guess there aren't many counterintuitive answers here: Either get by without iCloud until you get a newer iPhone, or elect to use other syncing services like Dropbox, Box, or SpiderOak.

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sorry but what difference does it make to upgrade or not to iCloud drive once you install Yosemite? I said 'no' to the upgrade when installing Yosemite on my macbook, but changes made on the "icloud/pages" documents in the Pages App on my Mac (running Yosemite but NO iCloud Drive) do not appear anyway on my iphone4 ... so what is the advantage of not using iCloud Drive if it does not update anyway?? And iCloud.com isn't accessible either from safari unless you upgrade... For what it seems, the 'old' iCloud is gone, as far as my iphone4 is concerned

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