I want to test the migration from Magento 1 live site to my local system first. Then I will do actual server to server migration from Magento 1 to Magento 2. Is that possible?
You can make a test migration at your choice. However, from our experience with many completed projects so far, please consider proceeding with the official migration. This will save you pretty much of time. Besides, please start with the migration on a staging instance as it will be more effective for us to provide you technical assistance when you might need it.
Meanwhile, you should follow all required steps and the migration guideline in the Readme manual that comes packed with your download package.