I'm not clear on what is the desired behavior vs the current behavior.
If you want the old xmls to open with the old xsns, then use Do Nothing.
If you want the old xmls to get updated to the new xsn, then use Automatically Upgrade.
PS: Saving to the local machine is bound to cause issues. Ideally, all users are accessing the latest and greatest xml from the Sharepoint site, so as to not work with a potentially outdated xml that they saved locally in the past.