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I just say 5% less than what I want. Are they really going to sue me? Nope!

Why would you ask for less than what you want? You are most likely going to get an offer of less than whatever you ask for.

I think it's saying your current salary is five percent less than what you want for the new job?

They'd expect you to be wanting an increase in order to move?

Exactly that. It establishes both their willingness to outdo a previous offer and their generosity at the same time.